Charter Considering RDOF Grants

Charter let the world know that it plans to pursue RDOF grant funding in its most recent 8-K filing with the Securities and Exchange Commission. The company says that it might pursue grant funding to build to ‘multi-million passings’ involving ‘multi-billion investments’. It’s an interesting strategy. Charter already serves rural county seats and other towns across the country which puts them close to many of the areas where RDOF funding is available.

The RDOF grants cover the most rural and remote pockets of customers in the country. While there are some small rural towns included in the RDOF grant footprint, most of the customers covered by the grants are truly rural, consisting of farms and scattered homes in rural counties.

Charter will have to make some technology choices about how to serve rural America. The company can win the most money in the grant process if they file as a gigabit-speed provider. Gigabit speeds are available today with fiber technology and also with the hybrid fiber-coaxial networks operated by Charter and other cable companies. The RDOF grants can be awarded to technologies that support speeds over 25/3 Mbps. However, the grant includes incentives to favor ISPs willing to use faster technologies.

Charter could pursue slower technologies, like fixed wireless, but that funding is harder to win. To date, none of the big cable companies have ventured into wireless technology, other than a few trials. It’s always been a bit of a mystery why Charter and other cable companies haven’t erected wireless antennae at the fringes of their network to cheaply capture customers just out of reach of the HFC networks. My theory has always been that big cable companies are not nimble enough to handle drastically different technology platforms since all of their processes are designed for around coaxial and fiber technologies.

Charter is likely considering building fiber-to-the-home networks if they win RDOF grant funding. The hybrid fiber-coaxial technology that cable companies use in urban areas is poorly suited to serving scattered rural customers. The signal on an HFC network has to be boosted every two miles or so, and every time the signal is amplified some of the effective bandwidth carried on the network is lost. It would be a major challenge to maintain gigabit speeds required by the grants on a rural HFC network. It would only be possible with lots of fiber and tiny neighborhood nodes serving only a few homes. Charter has often cited the technology challenges of uses HFC technology in low-density areas as the reason it doesn’t expand outward from existing markets – and those reasons still hold true.

Charter claims to have expanded to add 1.5 million homes to its existing networks over the last two years, and in the 8-K filing says these are mostly rural customers. However, from what I’ve heard, most of these new Charter neighborhoods are in small subdivisions surrounding existing Charter markets. Charter has not been building rural networks to reach 1.5 million farms.

Charter and the other big cable companies have quietly introduced last-mile fiber technology into their networks. When cable companies build into new subdivisions today, they mostly do so with fiber technology.

It would be interesting if Charter’s strategy is to use the grant money to build fiber to farms. I know plenty of other ISPs considering the same business plan in places where there is enough RDOF grant funding available to make a business case.

There is no guarantee that Charter will ultimately win any grant funding and filing the grant short form on July 15 only gives Charter the option to participate in the auction in October. However, if the company bids in the auction, it will be good news for markets where Charter would build fiber technology. The big downside to the RDOF grant process is that in markets where no ISPs propose to build gigabit technology, the funding could end up going to satellite broadband providers – and there is no rural neighborhood that would prefer Viasat over Charter.

Charter Asks the FCC to Allow Data Caps

In a move that was probably inevitable, Charter has petitioned the FCC to allow the company to begin implementing broadband data caps. Charter has been prohibited from charging data caps as part of an agreement with the FCC when the agency approved the merger with Time Warner Cable in 2016. Charter is also asking the FCC to lift another provision of the merger agreement that prohibits the company from imposing interconnection fees on Netflix and other companies that generate large amounts of web data.

There was one other requirement of the original merger agreement that the FCC already modified in 2017. Charter had voluntarily agreed to pass 2 million new homes within five years of the merger agreement. The original agreement with the FCC required Charter to compete against other cable companies, but in 2017 that was changed to require Charter to instead pass 2 million new homes.

The merger agreement between the FCC and Charter is in effect until May 2023, but the original deal allowed Charter to ask to be relieved of the obligations after four years, which is the genesis of this request. If granted, the two changes would occur in May 2021.

Charter is asking to lift these restrictions now because the original order allowed them to do so this year. There seems a decent likelihood that the FCC will grant the requests since both Chairman Ajit Pai and Commissioner Michael O’Rielly voted against these merger conditions in 2016 and said the restrictions were too harsh.

What I find interesting is that Charter has been bragging to customers for the last four years about how they are the large ISP that doesn’t impose burdensome data caps on customers. This has likely given them a marketing edge in markets where the company competes against AT&T, which aggressively bills data caps.

Charter has to be jealous of the huge dollars that Comcast and AT&T are receiving from data caps. Back in 2016, there were not many homes that used more data than the 1 terabyte cap that AT&T and Comcast place on customers. However, home broadband usage has exploded, even before the COVID-19 pandemic.

OpenVault reported in early 2018 that the average home used 215 gigabytes of data per month. By the end of 2019, the average home usage had grown to 344 GB monthly. During the pandemic, by the end of March 2020, the average home used 402 GB.

What’s more telling is the percentage of homes that now use a terabyte of data per month. According to OpenVault, that’s now more than 10% of homes – including nearly 2% of homes that use more than 2 terabytes. Just a few years ago only a tiny percentage of homes used a terabyte per month of data. Charter has undoubtedly been measuring customer usage and knows the revenue potential from imposing data caps similar to Comcast or AT&T. If Charter can charge $25 for exceeding the data caps, with their 27 million customers the data caps would increase revenues by over $800 million annually – for usage they are already carrying on their network. Charter, like all of the big ISPs, crowed loudly that their networks were able to easily handle the increase in traffic due to the pandemic. But that’s not going to stop them from milking more money out of their biggest data users.

The US already has some of the most expensive broadband in the world. The US landline broadband rates are twice the rates in Europe and the Far East. The US cellular data rates rival the rates in the most expensive remote countries in the world. Data caps imposed by landline and cellular ISPs add huge amounts of margin straight to the bottom lines of the big ISPs and wireless carriers.

What saddest about all of this is that there is no regulation of ISPs and they free to charge whatever they want for broadband. Even in markets where we see a cable company facing competition with fiber from one of the telcos, there is seemingly no competition on price. Verizon, AT&T, and CenturyLink fiber cost roughly the same in most markets as broadband from cable companies, and the duopoly players in such markets gladly split the customers and the profits for the benefit of both companies.

I’ve written several blogs arguing against data caps and I won’t repeat the whole argument. The bottom line is that it doesn’t cost a big ISP more than a few pennies extra to provide service to a customer that uses a terabyte per month at home compared to a home that uses half that. Data cap revenue goes straight to the bottom line of the big ISPs. For anybody that doesn’t believe that, watch the profits at Charter before and after the day when they introduce data caps.

Broadband Stats for 2019

Leichtman Research Group recently released the broadband customer statistics for the end 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 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 count that as 1 customer, whereas for FCC reporting they are likely to count the number of apartment units served.

4Q 2019 2019 Change % Change
Comcast 28,629,000 1,407,000 5.2%
Charter 26,664,000 1,405,000 5.6%
AT&T 15,389,000 (312,000) -2.0%
Verizon 6,956,000 (5,000) -0.1%
Cox 5,170,000 110,000 2.2%
CenturyLink 4,678,000 (134,000) -2.8%
Altice 4,187,300 71,900 1.7%
Frontier 3,500,000 (235,000) -6.3%
Mediacom 1,328,000 64,000 5.1%
Windstream 1,049,300 28,300 2.8%
Consolidated 784,165 5,195 0.7%
WOW 781,500 21,900 2.9%
Cable ONE 773,000 39,000 5.3%
TDS 455,200 31,800 7.5%
Atlantic Broadband 451,463 25,857 6.1%
Cincinnati Bell 426,700 1,100 0.3%
101,222,628 2,525,052 2.6%

Leichtman says this group of companies represents 96% of all US broadband customers. For the year these large ISPs collectively saw growth that annualizes to 2.6%.

The customer additions for 2019 for these large ISPs are just slightly higher than customers additions for 2018. The cable companies performed a little better in 2019 while the losses continue to accelerate for the big telcos. The big telco losers for the year are Frontier, which lost 6.3% of its customer base, AT&T (lost 2.0 %) and CenturyLink (lost 2.8%). AT&T claims to have added 1.1 million customers to fiber for the year, so they are still losing a lot of customers on DSL. Frontier is a total disaster and there may be no recovery for the company if they keep losing broadband customers at a pace of over 6% annually.

‘                                        2018                 2019

Cable Companies        2,987,721        3,144,657

Telcos                           ( 472,124)        ( 619,605)

Total                             2,425,597        2,525,052

The two best-performing companies were again Comcast and Charter, which each added over 1.4 million customers for the year while the rest of the ISPs, including cable companies, collectively lost half a million customers.

One note on the above numbers – the TDS and Cable One numbers include adjustments due to small acquisitions).

The Dirty Secret of Coaxial Broadband

The US has clearly pinned our hopes for providing modern broadband on the big cable companies. At the end of 2019, the big cable companies had almost 68 million customers compared to 33 million for the big telcos. Any discussion of broadband in urban markets is mostly a discussion of big cable company broadband. Cable companies will continue to grow market dominance as urban DSL customers continue to migrate to cable modem. In 2019 the big cable companies added 3.1 million customers while the telcos lost over 600,000 customers.

The big cable companies have all advertised to their customers that they had upgraded to the latest technology in DOCSIS 3.1 and can now provide gigabit broadband – for an expensive price in most markets set well over $100 per month.

It’s easy to think of urban cable systems as up-to-date and high tech and ready and able to deliver fast broadband speeds. While this is true in some cities and in some neighborhoods, the dirty secret of the cable industry is that their networks are not all up to snuff. Everybody is aware of the aging problems that have plagued the telephone copper network – but it’s rare to hear somebody talking about the aging of the cable company copper networks.

Most of the cable networks were built in the 1970s, with some even a little older. Just like with telephone copper networks the coaxial networks are getting old and a network built around 1970 is now fifty years old.

Cable coaxial networks suffer more from deterioration than do telephone copper networks. The copper wires in a coaxial system are much larger and the wires hanging on poles act like a giant antenna that can receive a range of different frequencies. Any physical opening into the wire through a splice point or from aging creates a new ingress point for external frequencies – and that equates to noise on the coaxial network. Increased noise translates directly to decreased performance of the network. The capacity of the older coaxial networks is significantly lower than when the networks were first constructed.

Another issue with coaxial networks is that the type of coaxial cable used has changed over time and some of the coax used in the early networks can’t handle the capacity needed today. Some older coax has been replaced in urban networks, but not all. Coaxial networks in smaller towns still can contain a lot of older-generation coaxial cables.

These issues mean that coaxial networks don’t always perform as well as is touted by the cable companies. I can use the network in my city of Asheville NC as an example. Charter announced nationally that when it upgraded to DOCSIS 3.1 that it had a goal of raising broadband speeds everywhere to 200 Mbps. My speed at the modem is 135 Mbps. I’m not complaining about my speed and I’m glad they increased my speed, but there must be issues in the local network that stopped Charter from achieving its 200 Mbps goal.

We undertake surveys and citywide speed tests across the country and we often see that the performance of coaxial networks varies by neighborhood. We’ve seen neighborhoods where there are more outages, more variance in download speeds, and overall slower speeds than the rest of the city. These problems are almost certainly due to differences within a city of the quality of the coaxial network.

Cable companies could bring older neighborhoods up to snuff, but such upgrades are expensive. It might mean replacing a lot of drops and any runs of older coaxial cable. It might mean replacing or re-spacing amplifiers. It often means replacing all of the power taps (the devices that connect homes to the distribution cables). The upgrading effort is labor-intensive, and that means costly.

I think this means that many cities will never see another unilateral increase in broadband speeds unless the cable companies first make big investments. The cable companies have increased speeds every few years since 2000 to keep ahead of the telcos and to make customers happier with their service. I fear that since cable companies are becoming de facto monopolies in most cities that they have lost the incentive to get faster if that means spending money. The coaxial networks and speeds that we have in place today might be what we still have a decade from now, only with coaxial networks that are another ten years older.

Is OTT Service Effective Competition for Cable TV?

The FCC made an interesting ruling recently that signals the end of regulation of basic cable TV. Charter Communications had petitioned the FCC for properties in Massachusetts claiming that the properties have ‘effective competition’ for cable TV due to competition from OTT providers – in this case, due to AT&T DirecTV Now, a service that offers a full range of local and traditional cable channels.

The term effective communications is a very specific regulatory term and once a market reaches that status a cable company can change rates at will for basic cable. – the tiers that include local network stations.

The FCC agreed with Charter and said that the markets are competitive and granted Charter the deregulated status. This designation in the past has been granted in markets that have a high concentration of satellite TV or else that have a lot of alternative TV offered by a fiber or DSL overbuilder that has gained a significant share of the market.

In making this ruling the FCC effectively deregulated cable everywhere since there is no market today that doesn’t have a substantial amount of OTT content competing with cable companies. Cable providers will still have to go through the process of asking to deregulate specific markets, but it’s hard to think that after this ruling that the FCC can say no to any other petition.

From a regulatory perspective, this is probably the right ruling. Traditional cable is getting clobbered and it looks like the industry as a whole might lose 5-6 full percentage of market share this year and end up under a 65% national penetration rate. While we are in only the third year where cord cutting became a measurable trend, the cable industry customer losses are nearly identical to the market losses for landline telephone at the peak of that market decline.

There are two consequences for consumers in a market that is declared to be effectively competitive. First, it frees cable companies from the last vestiges of basic cable rate regulation. This is not a huge benefit because cable companies have been free for years to raise rates in higher tiers of service. In a competitive market, a cable provider is also no longer required to carry local network channels in the basic tier – although very few cable systems have elected this option.

I’ve seen several articles discussing this ruling that assume that this will result in an instant rate increase in these markets – and they might be right. It’s a headscratcher watching cable companies raising rates lately when higher rates are driving households to become cord cutters. But cable executives don’t seem to be able to resist the ability to raise rates, and each time they do, the overall revenue of a cable system increases locally, even with customer defections.

It’s possible that this ruling represents nothing more than the current FCC’s desire to deregulate as many things as possible. One interesting aspect of this ruling is that the FCC has never declared OTT services like SlingTV or DirecTV Now to be MVDPs (multichannel video program distributors) – a ruling that would pull these services into the cable TV regulatory regime. From a purely regulatory viewpoint, it’s hard to see how a non-MVDP service can meet the technical requirements of effective competition. However, from a practical perspective, it’s not hard to perceive the competition.

Interestingly, customers are not leaving traditional cable TV and flocking to the OTT services that emulate regular cable TV service. Those services have recently grown to become expensive and most households seem to be happy cobbling together packages of content from OTT providers like Netflix and Amazon Prime that don’t carry a full range of traditional channels. From that market perspective, one has to wonder how much of a competitor DirecTV Now was in the specific markets, or even how Charter was able to quantify the level of competition from a specific OTT service.

Broadband Price Increases

Back in late 2017 Wall Street analyst Jonathan Chaplin of New Street predicted that ISPs would begin flexing their market power and within three or four years would raise broadband rates to $100. His prediction was a little aggressive, but not by much. He also predicted that we’re going to start seeing perpetual annual broadband rate increases.

Stop the Cap! reports that Charter will be raising rates in September, only ten months aftertheir last rate increase in November 2018. The company will be increasing the price of unbundled broadband by $4 per month from $65.99 to $69.99.  Charter is also increasing the cost of using their WiFi modem from $5.00 to $7.99. This brings their total cost of standalone broadband for their base product (between 100 – 200 Mbps) with WiFi to $78.98, up from $70.99. Charter also announced substantial price increases for cable TV.

Even with this rate increase Charter still has the lowest prices for standalone broadband among the major cable companies. Stop the Cap! reports that the base standalone broadband product plus WiFi costs $93 with Comcast, $95 with Cox and $106.50 with Mediacom.

Of course, not everybody pays those full standalone prices. In most markets we’ve studied, around 70% of customers bundle products and get bundling discounts. However, the latest industry statistics show that millions of customers are now cutting the cord annually and will be losing those discounts and will face the standalone broadband prices.

MoffettNathenson LLC, the leading analysts in the industry, recently compared the average revenue per user (ARPU) for four large cable companies – Comcast, Charter, Altice and Cable ONE. The most recent ARPU for the four companies are: Comcast ($60.86), Charter ($56.57), Altice ($64.58), and Cable One ($71.80). You might wonder why the ARPU is so much lower than the price of standalone broadband. Some of the difference is from bundling and promotional discounts. There are also customers on older, slower, and cheaper broadband products who are hanging on to their old bargain prices.

The four companies have seen broadband revenue growth over the last two years between 8.1% and 12%. The reason for the revenue growth varies by company. A lot of the revenue growth at Comcast and Charter still comes from broadband customer growth and both companies added over 200,000 new customers in the second quarter of this year. In the second quarter, Comcast grew at an annualized rate of 3.2% and Charter grew at 4%. This contrasts with the smaller growth at Altice (1.2%) and Cable ONE (2%), and the rest of the cable industry.

The ARPU for these companies increased for several reasons beyond customer growth. Each of the four companies has had at least one rate increase during the last two years. Some of the ARPU growth comes from cord cutters who lose their bundling discount.

For the four cable companies:

  • Comcast revenues grew by 9.4% over the two years and that came from a 4.4% growth in ARPU and 5% due to subscriber growth.
  • Charter broadband revenues grew by 8.1% over two years. That came from a 3.2% increase in ARPU and 4.9% due to subscriber growth.
  • Altice saw a 12% growth in broadband revenues over two years that comes from a 9.8% growth in ARPU and 2.2% due to customer growth.
  • Cable ONE saw a 9.7% growth in broadband revenues over two years due to a 7.5% growth in ARPU and 2.2% increase due to customer growth.

Altice’s story is perhaps the most interesting and offers a lesson for the rest of the industry. The company says that it persuades 80% of new cord cutters to upgrade to a faster broadband product. This tells us that homes cutting the cord believe they’ll use more broadband and are open to the idea of buying a more robust broadband product. This is something I hope all of my clients reading this blog will notice.

Cable ONE took a different approach. They have been purposefully raising cable cable prices for the last few years and do nothing to try to save customers from dropping the cable product. The company is benefitting largely from the increases due to customers who are giving up their bundling discount.

MoffettNathanson also interprets these numbers to indicate that we will be seeing more rate increases in the future. Broadband growth is slowing for the whole industry, including Comcast and Charter. This means that for most cable companies, the only way to continue to grow revenues and margins will be by broadband rate increases. After seeing this analysis, I expect more companies will put effort into upselling cord cutters to faster broadband, but ultimately these large companies will have to raise broadband rates annually to meet Wall Street earnings expectations.

Google Fiber Leaving Louisville

Most readers have probably heard by now that Google Fiber is leaving Louisville because of failures with their fiber network. They are giving customers two months of free service and sending them back to the incumbent ISPs in the city. The company used a construction technique called micro-trenching where they cut a tiny slit in the road, one inch wide and few inches deep to carry the fiber. Only a year after construction the fiber is popping out of the micro-trenches all over the city.

Everybody I’ve talked to is guessing that it’s a simple case of ice heaving. While a micro-trench is sealed, it’s likely that small amounts of moisture seep into the sealed micro-trench and freezes when it gets cold. The first freeze would create tiny cracks, and with each subsequent freeze the cracks would get a little larger until the trench finally fills up with water, fully freezes and ejects the fill material. The only way to stop this would be to find a permanent seal that never lets in moisture. That sounds like a tall task in a city like Louisville that might freeze and thaw practically every night during the winter.

Nobody other than AT&T or Charter can be happy about this. The reason that Google Fiber elected to use micro-trenching is that both big ISPs fought tooth and nail to block Google Fiber from putting fiber on the utility poles in the city. The AT&T suit was resolved in Google’s favor, with the Charter one is still in court. Perhaps Google Fiber should have just waited out the lawsuits – but the business pressure was there to get something done. Unfortunately, the big ISPs are being rewarded for their intransigence.

One obvious lesson learned is not to launch a new network using an untried and untested construction technique. In this case, the micro-trenches didn’t just fail, they failed spectacularly, in the worst way imaginable. Google Fiber says the only fix for the problem would be to build the network again from scratch, which makes no financial sense.

Certainly, the whole industry is going to now be extremely leery about micro-trenching, but there is a larger lesson to be learned from this. For example, I’ve heard from several small ISPs who are ready to leap into the 5G game and build networks using millimeter wave radios installed on poles. This is every bit a new and untested technology like micro-trenching. I’m not predicting that anybody pursuing that business plan will fail – but I can assuredly promise that they will run into unanticipated problems.

Over my career, I can’t think of a single example where an ISP that took a chance on a cutting-edge technology didn’t have big problems – and some of those problems were just as catastrophic as what Google Fiber just ran into. For example, I can remember half a dozen companies that tried to deploy broadband networks using the LMDS spectrum. I remember one case where the radios literally never worked and the venture lost their $2 million investment. I remember several others where the radios had glitches that caused major customer outages and were largely a market disaster.

One thing that I’ve seen over and over is that telecom vendors take shortcuts. When they introduce a new technology they are under extreme pressure to get it to market and drive new revenues. Ideally, a vendor would hold small field trials of new technology for a few years to work out the bugs. But if a vendor finds an ISP willing to take a chance on a beta technology, they are happy to let the customers of that ISP be the real guinea pigs for the technology, and for the ISP to take the hit for the ensuing problems.

I can cite similar stories for the first generation of other technologies including the first generation of DSL, WiFi mesh networks, PON fiber-to-the-home and IPTV. The companies that were the first pioneers deploying these technologies had costly and sometimes deadly problems. So perhaps the lesson learned is that pioneers pay a price. I’m sure that this failure of micro-trenching will result in changing or abandoning the technique. Perhaps we’ll learn to not use micro-trenches in certain climates. Or perhaps they’ll find a way to seal the micro-trenches against humidity. But none of those future solutions will make up for Google Fiber’s spectacular failure.

The real victims of this situation are the households in Louisville who had changed to Google Fiber – and everybody else in the City. Because of Google Fiber’s lower prices, both Charter and AT&T lowered prices everywhere in the city. You can bet it’s not going to take long to get the market back to full prices. Any customers crawling back to the incumbents from Google Fiber can probably expect to pay full price immediately – there is no real incentive to give them a low-price deal. As a whole, every household in the City is going to be spending $10 or $20 more per month for broadband – which is a significant penalty on the local economy.

‘Tis the Season for Rate Increases

Charter just announced their annual rate increases for cable TV and broadband. They are usually the first of the big companies to announce since they increase rates in November, while most other big companies do so after the new year.

The announced increases include the following:

  • The Broadcast TV surcharge will increase from $8.85 to $9.95 per month.
  • Settop box fees will increase from $6.99 to $7.50 per month.
  • Broadband prices for customers who are bundled with cable TV will increase from $54.99 to $59.99 per month.
  • Broadband prices for standalone broadband (no cable TV) will increase from $64.99 to $65.99 per month.

The cable TV increases follow the pattern we’ve seen among the big cable companies in that they are raising ancillary fees instead of the basic prices for cable packages. The Broadcast TV surcharge, which is paid by every TV subscriber, covers the costs of retransmission fees that Charter pays to over-the-air networks like ABC, CBS, FOX and NBC. Most customers probably think this is included in the cost of basic cable service, but by shifting this to a separate fee the cable companies can continue to advertise a low price for basic cable. I know what a lot of my clients pay for retransmission fees, and none of them are yet paying $9.95 per month, so it looks like Charter is padding this number with some profits.

I’m surprised that the Federal Trade Commission hasn’t slapped one of the cable companies for this billing practice. They have created ancillary fees like the Charter’s Broadcast TV surcharge along with other fees such as a ‘sports fee’ in order to be able to advertise prices that are lower than what customers pay. When a new customer subscribes to cable they often end up paying $15 – $20 more than the advertised price.

The settop box fee is another place where cable companies make a lot of money. Charter probably pays no more than $100 for a settop box, so their new increased fee of $7.50 per month pays back the cost of the box in only 13 months. The box fee is the most profitable part of the cable business since customers tend to keep settop boxes for an average of 5 years or more. At least Charter’s settop box rate is lower than the $9.95 currently charged by Comcast.

The real headline is the increase in broadband rates. I was just talking to a client yesterday who mentioned that they hadn’t changed broadband prices in over fifteen years. We have now entered an era where cable companies are likely to raise broadband prices every year. They are losing cable customers and telephone customers every year. While broadband customers are still increasing, the growth is now due to continued poaching of DSL customers since the overall pool of broadband customers is no longer growing rapidly. This means that the only way Charter and other cable companies will be able to meet Wall Street earnings expectations in the long-run is by raising broadband rates.

The $5 rate increase for bundled broadband is the largest broadband rate increase I’ve ever seen. Charter doesn’t disclose the number of customers that buy bundles. My firm, CCG conducts surveys for customers and we typically see around 70% of households buying a bundle of services. If 70% of Charter’s 24 million broadband customers are in bundles this equates to $1 billion in new annual revenues and bottom line for the company. Charter won’t realize the whole $1 billion since some customers are going to be under term contracts, but this is still by far the largest increase in broadband prices I’ve ever seen.

Interestingly, Charter just made it easier for customers to cut the cord. Before the rate increase there was a $10 per month differential between the price of bundled and unbundled broadband – meaning that somebody that dropped Charter cable would have seen a $10 rate increase. That penalty is now lowered to $5 per month. However, Charter just made up for that with the big rate increase.

Charter has recently increased broadband speeds across-the-board. They advertise that the minimum speed for their basic product has been increased from 100 Mbps to 200 Mbps (although in my markets speeds have increased from 60 Mbps to 135 Mbps). I’m guessing that Charter is hoping the speed increases will help to justify the $5 broadband rate increase that a lot of their customers are going to see.

Regulating VoIP

The regulation of Voice over IP (VoIP) has been disputed since the late 1990s when Vonage and other VoIP providers burst onto the scenes. In the latest action, the Eighth Circuit Court of Appeals ruled that the Minnesota Public Utilities Commission cannot regulate the VoIP service offered by Charter Communications.

Before looking at that ruling, let me review the history of VoIP regulation. When Vonage and others first offered VoIP a number of states immediately sought to regulate the VoIP companies using what I would call the ‘quack like a duck’ argument that the function of VoIP was to complete telephone calls and that changing the underlying technology didn’t change the nature of the service.

After various regulatory rulings and the subsequent legal challenges it was finally determined that the VoIP offered by Vonage was not the same as regulated voice service because it wasn’t ‘interconnected’ voice. Interconnection is a term defined by the FCC meaning that a telephone call must be originated and terminated using the public switched telephone network (PSTN) established to trade calls between different phone companies. Vonage originated calls using the open Internet and only used the PSTN to terminate calls. This loophole, based upon the FCC definition of a phone call, eventually freed Vonage from most telco regulation, although VoIP providers were required to offer access to 911.

When cable companies started to offer telephone service they adopted the strategy of trying to get their telephone service also classified as VoIP to avoid regulation. They talked about offering VoIP before their voice product even hit the street. However, telephone service on a cable network is not the same as Vonage. Where Vonage customers bypass the PSTN on the originating side of the call, cable companies have always used the PSTN to originate and terminate calls, and from a functional perspective their networks and telco networks look identical.

Cable companies argued that they are VoIP because a customer called is converted to an IP format at the customer location and transmitted digitally across their networks. Their argument relied entirely on the fact that their technology used the ‘IP’ part of VoIP and that preempted them from regulation. Surprisingly, a lot of state regulators agreed with the cable companies and freed them from voice regulation, in what I would classify as regulatory rulings as a result of heavy lobbying. Cable company voice has never, to this day, passed the ‘quack like a duck’ test and they still use the PSTN in the same manner as telephone companies.

We ended up with a patchwork of VoIP regulation as different states took different positions on the issue. Cable companies eventually changed tactics and shot for a different regulatory loophole. They began to argue that VoIP is an information service and not a telecommunications service. They wanted this classification since the FCC had several rulings in other areas, not related to VoIP, that the agency isn’t authorized by Congress to regulate information services. I literally laughed out loud the first time I read this argument and I didn’t expect any regulator to ever accept it, because if making a telephone call isn’t a telecommunications service, then nothing is.

However, in the Minnesota case the cable companies finally talked a court into accepting the argument. The Minnesota case arose when Charter moved their VoIP product to a different subsidiary in an attempt to avoid the assessment of regulatory taxes and fees. The Minnesota PUC sought to impose the same taxes and fees on the new subsidiary, which prompted the lawsuit.

Charter still made the same technology argument that cable companies have used for years. They argued that their product isn’t a telecom service because telephone traffic on their network undergoes a ‘protocol conversion’ as the signal is transformed from analog to digital (for telephone folks, from TDM to IP). This is the decade-old argument that it’s VoIP if some portion of the call uses IP technology.

However, in this case Charter bolstered this argument by claiming that they offer features that prove that their VoIP is an information service. Charter cites as proof the use of features like offering a web portal to listen to voice mails, converting voice mails to text, and providing caller ID on a connected TV.

Technically, these are all ancillary services that have nothing to do with the direct delivery of a telephone call. Most telcos and cellular companies today offer these same features – and they all happen outside of the direct voice path. Recording a call to play back later doesn’t change the fact that a telephone call was made.

Surprisingly the courts agreed with Charter and declared that their VoIP product is an informational service. That exempts Charter from state regulation and the case is going to be used elsewhere by cable companies hoping to avoid regulation. You might want to read the ruling, but I’ll warn you that the circular logic will hurt your head. Apparently, if something now quacks like a duck it might really be a turkey.

New York Ousts Charter

The New York Public Service Commission voted on Friday to oust Charter from the state. They are revoking the approval of Charter’s acquisition of Time Warner Cable in 2016 due to the company failing to meet the requirements of that merger. The PSC has given Charter 60 days to present a plan for divesting it’s New York property and to subsequently leave the state. Charter announced almost immediately that they will appeal the decision, so expect a big ugly court fight.

The Commission’s order provides the justification for the drastic measure cites the following reasons for the order:

  • The company’s repeated failures to meet deadlines;
  • Charter’s attempts to skirt obligations to serve rural communities;
  • Unsafe practices in the field;
  • Its failure to fully commit to its obligations under the 2016 merger agreement; and
  • The company’s purposeful obfuscation of its performance and compliance obligations to the Commission and its customers.

One of the biggest items under contention is Charter’s agreement to extend its network to 145,000 unserved and underserved residential housing units within four years of the merger. Charter claims that they are meeting that commitment, but the PSC says that a lot of the passings counted by Charter were in places like New York City where the company already had an obligation under local franchise agreements to connect to customers. The PSC ‘s merger requirement specified that Charter would reach beyond its current network boundaries to add suburban and rural customers that are within reasonable range of the Charter network.

The PSC accuses Charter of lying to the PSC and the public about meeting its merger obligations. They say the company has repeatedly falsely advertised and told customers that it is exceeding its commitments to the state. Now that this is likely going to end up in court the facts will be made clear, and it’s likely that the PSC’s facts are correct or they wouldn’t have taken this extraordinary step.

I can only remember a few cases during my career where a state regulatory body disenfranchised a telco or cable company. The few cases I recall were based upon criminal behavior of the company owners. Cities have sometimes cancelled a cable TV franchise, but usually it’s been due to the cable company being nearly dead or bankrupt and the city wanting to be able to legally tear down unused cables.

It’s been routine practice for big ISPs to not fully meet commitments they promise during mergers negotiations with regulators. They generally take a weak stab at meeting commitments, but they’ve never fretted about not fully complying since the only recourse against them are fines, or something more drastic like is being done in this case. It may sound cynical, but I think big companies do the math and gladly accept fines when that’s cheaper than meeting a commitment.

The NY PSC order focused on Charter’s failure to meet merger conditions, but there is an older history of dispute between the PSC and the company. The PSC has had a long-standing dispute in upstate New York and accused Time Warner Cable (and eventually Charter) of defrauding the public by providing old and obsolete cable modems that were not capable of achieving the advertised broadband speeds. In 2013 Time Warner Cable promised the NY PSC it would fix the problem, but the commission sued the company (now Charter) in 2017 after it was shown that most of the old cable modems were still in service – although the cable company had subsequently begun advertising even faster speeds. It turns out that Time Warner / Charter was not only failing to replace old modems as promised, but they were still recirculating the obsolete modems back into service for new broadband customers.

I have no idea of how the courts might rule on this case because the suggested remedy of kicking Charter out of the state is unprecedented. I’d love to hear of any similar cases if readers know of them – but I can’t recall a state regulatory commission trying to kick a major ISP out of their state.

Obviously Charter could have avoided all of this by complying with the requirements of the merger. But I’m sure that an internal decision was made that the capital required to meet those conditions was more than the company is willing to spend. The company didn’t help its case if it lied to the PSC about meeting the commitments. It’s clear that Charter has been derelict in the earlier case of replacing obsolete cable modems and in that case they are clearly bad corporate citizens. It takes a lot for a regulatory to decide to oust a regulated company, and I guess Charter has crossed that line.