CenturyLink Announces Data Cap Trials

centuryLinkIn a move that probably surprises nobody, CenturyLink said that they are going to start trials of data caps later this year. This was mentioned by Stewart Ewing, the company’s chief financial officer, during the last quarterly investor call.

I have to say that I am disappointed by the announcement because I guess part of me hoped that CenturyLink was somehow different than the rest of the giant ISPs. After all, they started out as a regional independent telephone company that did the right thing for customers far more often than not.

But this announcement clearly shows that they now think like a duopolist, and that they really won’t fully compete against the big cable companies. CenturyLink is in the process of building a significant amount of last mile fiber and they say they will pass over 700,000 homes by the end of this year. I was just in Tacoma where CenturyLink has already overbuilt fiber to a large portion of the city and it looks like they are doing just what they promised.

CenturyLink (and formerly Qwest) has fared extremely poorly with their DSL product in major markets. The cable companies have largely won the broadband battles in the cities and have the lion’s share of broadband customers. And now that the cable companies like Comcast are really stepping up the speeds they offer, one has to think that urban DSL has to be in its dying days. It’s hard to imagine customers that will pay for a DSL connection that can get 15 Mbps or a lot less when for the same price they can get something far faster from the cable company.

So now CenturyLink is building fiber and this puts them back in the game and ahead of the cable companies again. One would think that CenturyLink would take advantage of Comcast’s data caps and advertise against them as a way to win quick market share. After all, once they have sunk money into a new fiber network, profitability becomes all about gaining as many customers as possible.

But instead CenturyLink is acting like a duopolist and will probably match Comcast’s data caps. I know that they will claim that this is only a trial of data caps, which is the same thing that Comcast is saying. But the lure of the extra revenues from data caps is just too attractive to all the big carriers.

Unfortunately, the big telcos and cable companies are almost all publicly traded companies. As such they are under tremendous pressure from Wall Street to show increased revenues and increased earnings year after year and quarter after quarter. This is getting harder and harder for these companies to do. For the last decade the big carriers have thrived from the ever-growing number of broadband customers. But it appears that overall growth of broadband customers is nearing an end. Several recent polls suggest that everybody that can afford broadband now has it. There is only a small percentage of households that don’t want broadband, but everybody else either has it or can’t afford it at the big company prices.

And so if broadband customers aren’t going to keep growing, and if cable TV and telephone customers are falling, then a big ISP only has a few places to go for revenue to continue to please Wall Street. Comcast is exploring a few new areas such as selling security, home automation and even cellular service. But it’s hard to think that those revenues will be enough to replace the torrid historical pace of broadband revenues and margins gained over the last decade. This means that the only realistic place for future revenue growth has to be from broadband.

That means raising the broadband rates every year, but it also means implementing tight data caps to be able to penalize people who actually use the broadband they buy. It’s clear that this is where Comcast is headed. A part of me hoped that companies like CenturyLink would not drink the same kool-aid and that they might just be happy taking the many disgruntled customers from the cable companies. But I guess that any duopolist has a hard time not doing what comes naturally. I fear we will have cities that finally have what everybody has always hoped for – a fast cable network competing against a fiber network – and yet there still will not be any real price competition.

What Happens to Unused CAF II Funds?

Fiber CableI look around rural America and I see fiber projects being proposed or built in a lot of places by small companies. Some of these are new initiatives like the new RS Fiber Cooperative that is underway in Sibley and Renville counties in Minnesota. And a lot of these new projects are being built by rural telcos and telephone cooperatives into areas adjacent to where they have always served.

While these small companies are building fiber the FCC is giving nearly $9 billion to the largest telephone companies to expand rural broadband. This was done under a program called CAF II that is part of the Universal Service Fund. The largest recipients of the funding are CenturyLink, Frontier and AT&T.

The CAF II funding has embarrassingly modest goals and only requires that the money be used to bring rural broadband speeds up to 10 Mbps download and 1 Mbps upload. The big telcos have a very relaxed six years to get this done. The telcos are mostly going to accomplish this by extending fiber from rural towns, into the country to support rural DSL.

I’m sure since most of my readers are knowledgeable about broadband that they realize how pathetically slow the 10 Mbps goal is. Already today 10 Mbps is not really broadband, even by the FCC’s own definition. A household that gets upgraded to 10 Mbps is probably going to be happy to get off dial-up, but they will soon realize that they are still far worse off than most of the rest of the country.

And while 10 Mbps is slow at today’s demand it’s been clear for decades that household demand for broadband has been doubling about every three years, back to the earliest days of the slowest dial-up. The folks at the tail-end of the six-year upgrades are going to be two more doublings of demand behind, meaning that in six years that 10 Mbps will feel basically four times worse than it does today.

In looking around at rural fiber projects I see fiber being built in areas where the telcos are going to get the CAF II subsidies. I wonder what will happen to the CAF II funding being used for those areas? Will the large telcos build DSL anyway even though nobody is going to buy it? Or will they just pocket the federal money and do nothing in those areas?

I don’t see anything in the CAF II rules that makes the large telcos give back any of the money, and so I suppose they will just keep it. This whole program is one of the worst uses of public funding I have ever seen. It’s easy to imagine the hundreds of rural fiber projects this money could have seeded. But instead the big telcos will be building DSL and will likely be loading up the claimed costs of the upgrades so they can get by with the least amount of actual upgrades possible.

Since the telcos already own wires in the places that will get upgraded they will be able to build fiber by overlashing. That is a process of tying fiber to existing copper lines and was the primary technique used by Verizon to build their FiOS fiber network. Overlashing is the lowest cost method of fiber construction and shouldn’t cost more than $15,000 to $20,000 per mile. If the whole $9 billion was used to build fiber that would mean building between 450,000 and 600,000 road miles of fiber. Wikipedia says that the US has less than 3 million miles of roads in the US including city streets, so this money could bring fiber to a significant percentage of rural areas. Of course, probably half of the money needs to be used for electronics, but that still means that the telcos ought to be using the CAF II money to build more than 200,000 miles of rural fiber.

If this money had instead been used to seed fiber innovators it could have brought fiber to millions of rural customers. If used as matching grants the $9 billion could have been leveraged to build $40 billion or $50 billion of rural fiber. Instead, every place that gets upgraded to the slow DSL is still going to need fiber and, for all practical purposes will be no closer to a true broadband solution than they are today.

New Skinny Bundles on the Horizon

television-sony-en-casa-de-mis-padresAll of a sudden I am seeing the term skinny bundle all over industry press. The term refers to web video programming offered by a company that is already somehow in the telecom business, with the inference that it’s probably only available to their own customers. The line between skinny bundles and OTT programming like Netflix is likely to get blurred over the next year as a few of the skinny bundle providers make their packages available to everybody.

It seems like all of the largest cable companies and telcos either have skinny bundles or are working on them. In a recent blog I talked about the Comcast skinny bundle they are calling Stream TV. It’s a lineup containing mostly major network channels plus HBO. It’s likely to be controversial because Comcast wants to exclude usage on the bundle from any data caps while counting data usage for watching Netflix and other OTT offerings.

As has been anticipated since they bought DirecTV, AT&T plans to launch their skinny bundle in January. The company hasn’t released the details yet but recently gave some hints about what might be in it. For one thing, through DirecTV the company has the ability to air current season shows, including the latest episodes. AT&T may be offering different options to wireless and wireline customers. CEO Randall Stephenson was quoted recently saying that the bundle will “turn some heads”, but I guess we’ll have to wait until January to see what that means.

Their chief rival Verizon Wireless launched Go90 earlier this year. The package is an interesting mix that Verizon says is aimed at Millennials. Verizon describes the package as halfway between YouTube and Netflix. It has a lot of unique content produced by YouTube stars but also carries some traditional programming content. The service is currently free to Verizon wireless subscribers but is expected to soon have a premium tier.

On the landline side, Verizon offers a package called Custom TV. That bundle is sold in combination with 25 Mbps Internet service for $65 a month, and includes a lineup of about 35 channels plus a few additional add-ons options available. The package has been so popular that Verizon reports that one third of their new customers in the second quarter of this year opted for the skinny bundle. While Verizon says that might hurt revenue targets, they affirmed what many have thought in that they expect sales of skinny bundles to increase the bottom line. It makes sense that the skinny bundles, while smaller, are more profitable than the giant bundles of hundreds of channels.

CenturyLink has also announced that they will launch a skinny bundle in early 2016. They say that their main motivation is to sign up new customers without the need for a truck roll, and so they might offer both a skinny bundle as well as the full TV line-up over the web. This will save them on settop boxes and other costs associated with being a full-service video provider.

There are other companies also considering skinny bundles. For instance, Frontier has reported that they are talking to programmers about skinny bundle options. There was an announcement in October that Tim Warner Cable was trialing a skinny bundle but I haven’t seen any press on that since then. CEO Rob Marcus has been quoted several times in the last six months saying that he doesn’t think his customers are looking for a cheaper alternative.

We’ll have to wait a while to see what kind of interest the public has in the skinny bundles. The companies like Verizon that have already launched skinny bundles are not reporting customers counts for the new products, making it hard for the rest of the industry to understand the customer demand.

The skinny bundles are clearly an attempt to try to keep cord cutters on the big company networks. But just about all of these big companies publicly say that cord cutting is not a concern for them. There has to be some concern that offering smaller bundles will invite customers to downsize, but if what Verizon admits is true, it might be that there is more profit in skinny bundles than in the giant cable packages – in which case you can expect to see more skinny bundle options.

Cable Companies Try Skinny Bundles

Comcast truckWhile all of the cable companies and their trade organizations publicly deny that cord cutting is a real phenomenon, in this most recent quarter most of the large cable companies have announced a skinny bundle package delivered over the web. It’s hard to think that these packages are aimed at anybody but cord cutters and in fact, one has to wonder if they might lure more people away from the big packages.

CEO Rob Marcus of Time Warner Cable says that their skinny bundle is an attempt to get rid of settop boxes. TWC just announced in New York and New Jersey that all cable customers can now use Roku instead of settop boxes. He said that TWC has a long-term strategy to get out of the settop box business, which is a big expense for the company and something that customers really don’t like paying for. I know that for most of my clients the monthly settop box rentals are one of the most profitable parts about selling cable TV and so his statement puzzles me a bit. But my clients are not working in major metropolitan markets and perhaps the total cost of tracking and swapping boxes is different for a large company.

But since TWC offers Roku for everybody I’m not sure that settop boxes are a very good explanation for their skinny bundle. TWC is now trialing a skinny bundle in New York City, available only to its data customers. It starts at $10 per month for 20 channels with options to add movie channels and other networks running up to $50 per month. That sure looks to be aimed at cord cutters.

And most of the other cable companies are also limiting their offerings to their own data customers. For instance, Comcast has launched a trial in the Boston area of a skinny bundle they are branding as Stream for their own data customers at $15 per month, including all taxes and fees. The package includes local networks, HBO, and some streaming movies. They plan to take this nationwide in 2016. The unique feature of the Comcast product is that it is not truly an OTT product since it doesn’t use the shared data stream but is delivered with separate bandwidth on the cable network.

Charter has launched what they are calling Spectrum TV. It starts at $12.99 per month and comes with a free Roku 3 player. This bundle contains 19 channels including the four major off-air networks. For an additional $7 per month customers can add more channels including ESPN, and for even more money customers can add HBO or Showtime. .

CableVision launched packages back in April of this year that includes a digital antenna for receiving local channels. They are offering a 50 Mbps data product plus the antenna plus HBO for $44.90 per month.

This isn’t limited to just the cable companies. CenturyLink is supposedly getting ready to trial a skinny bundle for its data customers. There are no details yet of pricing or line-up.

This all got started with Dish networks and their Sling TV product. Unlike these other products that, for now, are only available to the data customers of each ISP, Sling is available to anybody with a fast enough connection. I previously reviewed Sling TV and it had a lot of problems. I tried it during the first football game of the season and it was so bad that I abandoned it. I just watched Maryland beat Georgetown in basketball last night and the video was still out of sync with the audio. It’s getting better, but is still not as good as cable TV.

It’s interesting that most of the companies like CenturyLink say their skinny bundles are aimed at cord cutters, but even more specifically are aimed at millennials. I look at the channels offered and my bet is that baby boomers like me are going to more interested in this than millennials. I guess we’ll have to wait and see who subscribes to the skinny bundles.

Barriers to Broadband Deployment on Federal Lands

Road through parkCenturyLink’s VP of Regulatory Affairs, Jeb Benedict testified recently at the House Energy and Commerce subcommittee that there are a number of barriers to rural broadband deployment when a fiber needs to pass though federal or tribal land. He said that CenturyLink would support legislation that would do the following:

  • Require that federal agencies give priority to rights-of-way applications and establish time frames in which they must respond to applications to build broadband.
  • Make it easier to put fiber into areas that were previously disturbed like the shoulder of a roadway.
  • Minimize or even eliminate permitting fees and leases for rights-of-way for fiber projects.
  • Require federal agencies to work together when necessary for fiber projects.

CenturyLink is right about all of these items and I’ve seen projects get bogged down over these issues many times. For example, the process and paperwork required to build fiber through federal park land can be gruesome and time consuming. There are different processes to follow for different kinds of federal land and so the process differs depending upon whether something is a national park, a national forest, or just general federal land. And there are often numerous barriers for getting fiber through tribal lands as well.

What I’ve always found mystifying is that building on park land always treats each new application like it is the first time that telecom is being built there. It’s no easier to put fiber where copper has been run before and you have to start from scratch. What is particularly frustrating is that, as Mr. Benedict pointed out, a lot of hoops have to be jumped through to build into the rights-of-ways or roads where the dirt was dug up already while constructing the road. There are often environmental and archaeological studies required to bury conduit in these rights-of-ways that have clearly already been fully excavated in the past when building the road.

National Parks are the hardest places to build. I have a client who found grant money to bring wireless service to the Channel Islands off San Diego, much of which is a national park. The area had cellular coverage in the past but the carriers were removing the cell towers which means that the islands would be cut off from communications. The park wanted basic services like the ability of park visitors to call 911 and wanted data for the park rangers and a few others who still live on the islands.

But the barriers to building there were so stringent that the project could never be made to work. The park wouldn’t allow the construction of any new buildings or enclosures of any kind. They would not allow any dirt on the islands to be disturbed, meaning no digging of any kind. And there were incredibly expensive environmental studies required that I recall cost $150,000. Even though the people that worked at the park wanted new wireless service, and even though there would be great public benefit, the national park service rules basically made it impossible to install telecom gear.

And I have similar stories from all over the country. Trying to get fiber through national forests is almost as hard as national parks. Applications to build can be delayed for seemingly forever. There are usually environmental studies to be done even to build in existing rights-of-ways on existing roads, and there are numerous rules about how and when construction can be done. I’ve seen companies route fiber many miles out of the best path just to avoid the hassle of building through the federal land.

The problem is that these federal lands are often surrounded by rural communities that badly need broadband. But it’s hard to build fiber, cellular towers, or any kind of infrastructure if the parkland creates a barrier for reaching the areas with fiber.

It’s not just parklands that are a problem. Just trying to build under an interstate highway overpass or across a federal bridge can also be a very slow process. And those are found everywhere. As CenturyLink points out, there is no requirement that the agencies involved look at such requests in a timely manner. Sometimes such requests get processed quickly and sometimes they languish for a very long time.

If the federal government really wants to promote more rural fiber then they need to eliminate the barriers that they have created for their own lands, highways, and bridges.

US Telcos Indifferent to G.Fast

Speed_Street_SignG.Fast is a new technology that can deliver a large swath of broadband over copper wires for a short distance. The technology uses some of the very high frequencies that can travel over copper, much in the same way that DSL does for lower frequencies.

The International Telecommunication Union (ITU) just approved the final standard for the technology with the G.9701 standard for “Fast Access to Subscriber Terminals.” Several vendors including Alcatel-Lucent and Huawei have been producing and testing units in various field trials.

British Telecom has done a number of these tests. The largest such test was started in August for 2,000 customers in Huntingdon, Cambridgeshire. During the trial they are offering customers speeds of 330 Mbps, but they expect at the end of the trial to be able to raise this to about 500 Mbps.

The technology involves building fiber along streets and then using the existing copper drops to bring the bandwidth into the home. This is the most affordable kind of fiber construction because a telco can overlash fiber onto its existing copper wires on the poles. That means very little make-ready work, no permits needed, and no impediments to quick construction. This kind of fiber construction can literally be done at half of the cost faced by other fiber overbuilders.

British Telecom has done a number of trials across the country. Alcatel-Lucent has also done trials with Telkom Austria. But for the most part American telcos have shown no interest in the technology. The only real trial here that I’ve read about is a trial with CenturyLink in Las Vegas.

And I frankly don’t understand the reluctance. G.Fast is a halfway solution on the way to a full fiber deployment. As cable companies and overbuilders like Google are stepping up deployment of gigabit speeds, either through fiber or through fast cable modems using DOCSIS 3.1, the telcos have been announcing fiber builds to remain competitive. AT&T has announced gigabit fiber builds in more than twenty markets. CenturyLink says it will be passing 700,000 homes with fiber in 2016.

So why wouldn’t an American telo seriously consider G.Fast? With capabilities up to 500 Mbps in real-world applications it gives them a product that can compete well with other fast technologies. And by overlashing the fiber to deploy G.Fast the telco will have tackled one of the major costs of building an FTTP network, by getting the fiber deep into the network. And with G.Fast a telco can avoid the expensive fiber drops and electronics which are the most expensive part of a FTTP network for them.

I could envision somebody like CenturyLink building fiber to the more lucrative parts of town while deploying G.Fast to older copper neighborhoods. This would give them a far greater fast broadband coverage, making it easier and more cost effective to advertise their broadband.

But it seems like most of the US telcos just want out of the copper business. And so, rather than take this as an opportunity to milk another decade out of their copper networks before finally building fiber, they seem prepared to cede even more broadband customers to the cable companies. That has me scratching my head. The cable companies have clearly accepted that their entire future is as ISPs and that data is the only real product that will matter in the future. It just seems that the large telcos have not quite yet come to this same conclusion.

Finally, Speed Competition

cheetah-993774We are at the beginning of a big change in urban Internet speeds. Recently, there have been all sorts of announcements about companies upgrading speeds or wanting to build fiber in major markets.

For instance, Comcast says that they are going to upgrade all of their systems to DOCSIS 3.1 within about two years. This new CableLabs standard is going to allow them to offer far faster speeds to their customers. DOCSIS 3.1 allows a cable system to bond together empty channels to make one large data pipe and theoretically, if the networks were empty of television channels, they could offer download speeds up to 10 Gbps. But since there are still lots of cable channels on these network the more realistic maximum speeds for now will be a gigabit or maybe less depending upon the spare channels available in any given system.

Comcast has already started the process of upgrading customer speeds. For example, in much of the northeast they have upgraded customers from 25 Mbps to 75 Mbps and from 105 Mbps to 150 Mbps. They’ve announced that these same upgrades will be done in all of their systems. They’ve said in future years there will be more upgrades to go even faster.

Other cable companies are likely to follow suit. MediaCom has already made gigabit announcements. Time Warner in Austin also greatly increased speeds. Cox has announced aggressive plans for speeds. It’s likely almost all urban cable systems will be upgraded to DOCSIS 3.1 within a few years.

Meanwhile, CenturyLink has been starting the process of building fiber in most of their larger markets. It looks like they are building fiber in cities like Seattle, Portland, Minneapolis, Phoenix, Denver, Salt Lake City, and a number of other markets. They will offer speeds that vary from 40 Mbps for $30 to gigabit speeds for $80 as part of bundled packages. CenturyLink is also experimenting right now in Salt Lake City with G.Fast, testing a 100 Mbps product over copper. Between the two products the company thinks they will be able to offer faster speeds to a lot of urban and suburban customers.

And of course, Google has been rolling out fiber and can be credited with popularizing the concept of gigabit fiber. They have built or are launching in Kansas City, Austin, Atlanta, Provo, Salt Lake City, Nashville, Raleigh-Durham and now San Antonio. They have released a long list of other cities where they may go next.

Finally, there are numerous smaller companies and municipalities that are already building fiber or who have plans to build fiber.

Comcast’s new philosophy is a 180 degree turnabout from a few years ago when they said that customers didn’t need bandwidth and that they would give customers only what Comcast thought they needed. It seems now that Comcast is adopting the philosophy of unilaterally increasing speeds, even in markets where they might not have an immediate competitor on the horizon. They already have the customers and they already have the networks and they can take the wind out of the sales of a potential fiber competitor if customers in any given markets already have fast speeds at an affordable price.

I think Comcast and the other companies are smart to do this. The higher-priced data products are probably the highest margin products we have ever had in this industry. It doesn’t cost a whole lot more than a few dollars to buy the raw bandwidth needed to serve a data customer and it’s widely believed that for large companies the margins are in the 80% to 90% range. It’s a wise decision to protect these customers, and by being proactive with speeds the cable companies will make it a lot harder for other companies to take their customers. And I think they have finally begun to learn the little secret that many have already figured out – faster speeds don’t really hurt profitability and a customers with a 100 Mbps connection doesn’t use much more data than one with a 20 Mbps connection, they just download things faster.

So what we are seeing now is competition through speed rather than competition through pricing. All of the comparisons I have ever seen show that US broadband prices are significantly higher than in any other developed countries. When Google or CenturyLink enters a market with $70 to $80 gigabit they are not lowering prices, and are actually luring customers to pay more than today. It’s an interesting market when even in the most competitive markets the prices don’t really come down.

CenturyLink Bullish on Fiber

CenturyLinkAt a time when AT&T wants to ditch millions of copper lines, and when Verizon apparently want to phase out of the wireline business and is even selling off FiOS, CenturyLink is taking a different approach.

The company has begun building gigabit fiber in a few cities and has announced plans to build in many more. CenturyLink has already deployed gigabit fiber to some residential customers in some parts of Omaha and Las Vegas, and to some businesses in Salt Lake City. The company has announced plans to provide new residential gigabit fiber in new markets including Seattle, Portland, Salt Lake City, Denver, Minneapolis / St. Paul, and in Columbia and Jefferson City in Missouri. Additionally the company plans gigabit fiber for businesses in Spokane, Sioux Falls, Colorado Springs, Albuquerque, Phoenix and Tucson.

This initiative makes CenturyLink the only large incumbent telco that is investing in fiber. And since the cable companies are mostly upgrading speeds in response to competition, this make CenturyLink the only large ISP that is being proactive with fiber.

With that said, I have no idea how much fiber they are actually going to build. CenturyLink inherited a company from Qwest with a very ugly balance sheet and which still today does not spin off enough cash to make a huge fiber investment. And so there is the possibility that they are building a little fiber in each market for press release purposes and not intending (or able) to finance the construction of a lot of fiber in the same way that Verizon invested in FiOS.

But in reading between the lines I think they really want to invest in fiber. CenturyLink inherited possibly the worst local network in the country when they merged with Qwest. Qwest had been in marginal financial shape for so long that they had let the networks in most markets deteriorate significantly. Qwest instead invested on long-haul and large city downtown fiber to make money in transport, long distance and sales to large businesses. And they did okay in those areas and have one of the best nationwide fiber networks.

CenturyLink has the most to lose of the large ISPs. AT&T and Verizon have become cellular companies that also happen to be in the landline business. The cable companies have captured the lion’s share of the residential data market almost everywhere. But CenturyLink has no fallback if they lose landline-based revenues. They inherited a network that lost the residential battler everywhere in head-to-head competition with the cable companies. And in every large city they have significant competition for business customers from CLECs, cable companies and fiber providers.

So I think CenturyLink has hit upon the right strategy. In every market (or at least in every neighborhood) there is likely to only be one fiber provider who is willing to build to everybody. Over time, as households and businesses want more data, fiber is going to be the only long-term network that will be able to satisfy future data demand.

I keep hearing about having gigabit wireless products someday, but the physics of that product will require mini cell sites that are close to customers. And that means having a cellular network that is fed by neighborhood fiber. Anybody who thinks that the cellular companies are going to be able to supply that kind of bandwidth with the current cellular networks doesn’t understand the physics of spectrum.

I wish CenturyLink well in this endeavor. Most of the potential markets want fiber and the company will do really well if they can find the financial resources needed to build significant fiber. Their copper networks are dying and there is very little they can do about that. There are currently some industry patches on copper such as using two copper pairs joined together, but these are band-aids being applied to a dying network. Looking twenty years into the future, if CenturyLink doesn’t build fiber they won’t have much left.

I am still surprised that Verizon is selling off mature cash-cow FiOS fiber networks like they recently announced. But Verizon has obviously been taken over by the wireless guys who seem to want them out of the wireline business. But CenturyLink has no other options, so I think they either go to fiber or watch their networks and their business slowly die.

Why Not Faster Data Speeds?

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

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

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

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

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

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

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

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

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

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

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

 

Who Will Go after the CAF II Funds?

USF-logoLast week the FCC announced the broadband guidelines that will be used to fund the Connect America Fund (CAF) Phase II filings that will be awarded in 2015. The FCC has set aside a little over $9 billion dollars of new CAF funding to be paid out of the next five to seven years. That’s five years for smaller recipients and up to seven years for some of the large telcos.

The new broadband goal is that any landline broadband connection built with these funds must be able to deliver at least 10 Mbps download and 1 Mbps upload. This increases the speed from the old threshold from 4 Mbps download and 1 Mbps upload. This is a really low threshold compared to the recent experimental grant program where the FCC only funded projects that delivered at least 25 Mbps download in unserved areas and 100 Mbps in underserved areas.

But setting the speed goal at only 10 Mbps download will enable rural telcos and cable companies to go after the funding if they are willing to use the funds to help to pay for extending their networks.

The telcos can use DSL to satisfy the CAF requirements, but in order to bring that DSL to rural areas they are going to have to expand fiber in their networks significantly. Current single-pair DSL technologies can deliver 10 Mbps to only about 7,000 feet of copper. That is not as the crow flies, but rather as the copper is wired. That provides  little more than a one mile circle around any given DSL distribution point (called a DSLAM).

Rural cable companies that already offer speeds of at least 10 Mbps only need to string more coaxial cable, or if they are going to new neighborhood may need additional fiber as well. However, some rural cable companies still use the first generation of DOCSIS equipment and they might need a significant upgrade of their network plus a replacement of cable modems in order to meet the new speed requirement.

Not unexpectedly, the large telcos are not happy with the increase from 4 Mbps to 10 Mbps. Many of them still deploy older  generation DSL equipment with maximum speeds between 1 Mbps to 6 Mbps. But to meet the CAF requirements they can use newer DSL for the new customers and don’t have to necessarily upgrade the older ones. It would be a bit ironic if the farms around rural towns end up with faster DSL than is available in the nearby towns.

We already know that AT&T and Verizon are trying hard to ditch their rural copper. Verizon already sold off most of their rural properties and wants to walk away from what they have left. AT&T has said that they want to walk away from “millions of lines of copper” by 2018 if the FCC will let them. Both companies want to replace landlines with wireless service, which costs more for a household and has severe data caps. So it is unlikely that these two companies are going to be seeking much CAF funding.

But there are a number of other large telcos who can’t walk away from copper because that is basically all they own. Companies like CenturyLink, Windstream and Frontier will be operating copper networks for many years to come. CenturyLink and Windstream are both expected to be major players in this second round of CAF funding.

Both Windstream and CenturyLink have complained about the new 10/1 Mbps requirement. I think this is because it is going to force them to do real upgrades to get the funding. In order to deliver that much bandwidth to rural areas they will have to move DSLAMs much further out into the field, and that is going to mean building fiber to connect to the DSLAM cabinets. And of course, typically the further away you get from a town, the fewer customers are on any given route to help pay for these new investments, especially the parts that the CAF isn’t going to fund.

One of the most interesting aspects of the new CAF fund is that that the subsidy can go to anybody who can bring the bandwidth. And so these large carriers must compete for the funds against players like electric cooperatives and wireless ISPs (WISPS). The funds are being awarded by a process called a reverse auction, because the company that asks for the least amount of support per customer in a given area will get the CAF funding. The only major requirement is that a CAF winner has to be able to deliver the required data speeds plus voice over the whole area to get the funding. They can’t just pick off pockets of customers like they might with a normal overbuild business plan.

The FCC is hoping that the CAF funding is going to bring broadband to at least several million more homes. But because of the reverse auction it’s really hard to predict how effective the funding will be. Further, if the bigger companies figure out that it’s not worth taking the funding, then much of the funding might go unclaimed. The old High Cost Fund was based upon providing service to rural places that had high costs by definition. If you built a network in one of the designated high cost places you got the subsidy to help keep it operating. But the reverse auction adds a lot of uncertainty to the process. It’s certainly possible that the large telcos might decide that the whole process is too risky to worry with and could send the FCC back to the drawing board.