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.

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.

Charter’s Plans for 6G

It didn’t take long for somebody say they will have a 6G cellular product. Somebody has jumped the gun every time there has been migration to a new cellular standard, and I remember the big cellular companies making claims about having 4G LTE technology years before it was actually available.

But this time it’s not a cellular company talking about 6G – it’s Charter, the second largest US cable company. Charter is already in the process of implementing LTE cellular through the resale of wholesale minutes from Verizon – so they will soon be a cellular provider. If we look at the early success of Comcast they might do well since Charter has almost 24 million broadband customers.

Tom Rutledge, the Charter CEO made reference to 5G trials being done by the company, but also went on to tout a new Charter product as 6G. What Rutledge is really talking about is a new product that will put a cellular micro cell in a home that has Charter broadband. This hot spot would provide strong cellular coverage within the home and use the cable broadband network for backhaul for the calls.

Such a network would benefit Charter by collecting a lot of cellular minutes that Charter wouldn’t have to buy wholesale from Verizon. Outside of the home customers would roam on the Verizon network, but within the home all calls would route over the landline connection. Presumably, if the home cellular micro transmitters are powerful enough, neighbors might also be able to get cellular access if they are Charter cellular customers. This is reminiscent of the Comcast WiFi hotspots that broadcast from millions of their cable modems.

This is not a new idea. For years farmers have been buying cellular repeaters from AT&T and Verizon to boost their signal if they live near the edge of cellular coverage. These products also use the landline broadband connection as backhaul – but in those cases the calls route to one of the cellular carriers. But in this configuration Charter would intercept all cellular traffic and presumably route the calls themselves. There are also a number of cellular resellers who have been using landline backhaul to provide low-cost calling.

This would be the first time that somebody has ever contemplated this on a large scale. One can picture large volumes of Charter cellular micro sites in areas where they are the incumbent cable company. When enough homes have transmitters they might almost create a ubiquitous cellular network that is landline based – eliminating the need for cellular towers.

It’s an interesting concept. A cable company in some ways is already well positioned to implement a more traditional small cell cellular network. Once they have upgraded to DOCSIS 3.1 they can place a small cell site at any pole that is already connected to the cable network. For now the biggest hurdle to such a deployment is the small data upload speeds for the first generation of DOCSIS 3.1, but cable labs has already released a technology that will enable faster upload speeds, up to synchronous connections. Getting faster upload speeds means finding some more empty channel slots on the cable network and could be a challenge in some networks.

The most interesting thing about this idea is that anybody with a broadband network could offer cellular service in the same way if they can make a deal to buy wholesale minutes. But therein lies the rub. While there are now hundreds of ‘cellular’ companies, only a few of them own their own cellular networks and everybody else is reselling. Charter is large enough to probably feel secure about having access to long-term cellular minutes from the big cellular companies. But very few other landline ISPs are going to get that kind of locked arrangement.

I’ve always advised clients to be wary of any resell opportunity because the business can change on a dime when the underlying provider changes the rules of the game. Our industry is littered with examples of companies that went under when the large resale businesses they had built lost their wholesale product. The biggest such company that comes to mind was Talk America that had amassed over a million telephone customers on resold lines from the big telcos. But there are many other examples of paging resellers, long distance resellers and many other telco product reselling that only lasted as long as the underlying network providers agreed to supply the commodity. But this is such an intriguing idea that many landline ISPs are going to look at what Charter is doing and wonder why they can’t do the same.

Charter Upgrading Broadband

We are now starting to see the results of cable companies upgrading to DOCSIS 3.1. Charter, the second biggest ISP in the country recently announced that it will be able to offer gigabit speeds to virtually it’s whole footprint of over 40 million passings.

DOCSIS 3.1 is the newest protocol from Cable Labs that allows bonding an unlimited number of spare channel slots for broadband. A gigabit data path requires roughly 24 channels on a cable network using the new DOCSIS protocol. In bigger markets this replaces DOCSIS 3.0 that was limited to maximum download speeds in the range of 250 Mbps. I know there are Charter markets with even slower speeds that either operate under older DOCSIS standards or that are slow for some other reason.

Charter has already begun the upgrades and is now offering gigabit speeds to 9 million passings in major markets like Oahu, Hawaii; Austin, Texas; San Antonio, Texas, Charlotte, North Carolina; Cincinnati, Ohio; Kansas City, Missouri; New York City; and Raleigh-Durham, North Carolina. It’s worth noting that those are all markets where there is fiber competition, so it’s natural they would upgrade these first.

The new increased speed won’t actually be a gigabit and will be 940 Mbps download and 35 Mbps upload. (It’s hard to think there is anybody who is really going to care about that distinction). Cable Labs recently came out with a DOCSIS upgrade that can increase upload speeds, but there’s been no talk from Charter about making that upgrade. Like the other big cable companies, Charter serves businesses that want faster upload speeds with fiber.

Along with the introduction of gigabit broadband the company also says it’s going to increase the speed of it’s minimum broadband product. In the competitive markets listed above Charter has already increased the speed of its base product to 200 Mbps download, up from 100 Mbps.

It’s going to be interesting to find out what Charter means by the promise to cover “virtually’ their whole footprint. Charter grew by purchasing systems in a wide range of conditions. I know of smaller Charter markets where customers don’t get more than 20 Mbps. There is also a well-known lawsuit against Charter in New York State that claims that a lot of households in upstate New York are getting speeds far slower than advertised due to having outdated cable modems.

The upgrade to DOCSIS 3.1 can be expensive in markets that have not yet been upgraded to DOCSIS 3.0. An upgrade might mean replacing power taps and other portions of the network, and in some cases might even require a replacement of the coaxial cable. My guess is that the company won’t rush to upgrade these markets the upgrade to DOCSIS 3.1 this year. I’m sure the company will look at them on a case-by-case basis.

The company has set a target price for a gigabit at $124.95. But already in the competitive markets like Oahu the company was selling introductory packages for $104.99. There is also a bundling discount for cable subscribers.

The pricing list highlights that they still have markets with advertised speeds as low as 30 Mbps – and the company’s price for the minim speeds is the same everywhere, regardless if that product is 30 Mbps or 200 Mbps. And as always with cable networks, these are ‘up to’ speeds and as I mentioned, there are markets that don’t meet these advertised speeds today.

Overall this ought to result in a lot of home and businesses getting faster broadband than today. We saw something similar back when the cable companies implemented DOCSIS 3.0 and the bigger companies unilaterally increased speeds to customers without increasing the prices. Like other Charter customers, I will be interested in what they do in my market. I have the 60 Mbps product and I’ll be interested to see if my minimum speeds is increased to 100 Mbps or 200 Mbps and if I’m offered a gigabit here. With the upgrade time frame they are promising I shouldn’t have to wait long to find out.

How’s Cable Doing?

Cord cuttingWith all of the talk of cord cutting, cord-shaving and the general demise of the cable industry I thought it would be useful to take a snapshot of the cable industry at the end of the third quarter of 2014 to see how the industry is doing. Here are some key facts for a numbers of major cable providers:

Comcast. For the quarter they lost 81,000 TV subscribers compared to losing 127,000 in the 3rd quarter of 2013. Meanwhile they gained 315,000 data customers compared to 297,000 customer a year before. Overall profits were up 4% over the year before. Comcast now has 22.4 million video customers and 21.6 million data customers.

Time Warner Cable. The company lost 184,000 cable subscribers in the third quarter compared to 122,000 in the previous year. But the company did add 92,000 residential data customers for the quarter. Earnings were up 3.6%, driven by cable rate increases and growth in the business services group. The company saw a 9.6% increase in programming costs, driven by a bad deal they made for the programming rights to the LA Dodgers.

Charter Communications. Charter lost 22,000 video customers for the quarter compared to 27,000 a year earlier. They saw data customers increase by 68,000 compared to 46,000 a year ago. Overall profits were up 8% driven by rate increases and data customer gains. Charter finished the quarter with 4.15 million cable customers.

CableVision. The company saw significant loss of 56,000 cable customers, Profits for the company dropped to $71.5 million for the quarter down from $294.6 million a year earlier.

Cable One. The company lost 14,000 video subs and ended with 476,000 at the end of the quarter. The company has not renewed programming from Viacom starting in April of this year

Suddenlink. The company added 2,200 video customers for the quarter compared to a loss the previous year of 3.200 subs even though they have dropped Viacom programming. Revenues increased by 6.6% compared to a year ago.

AT&T. U-verse added 216,000 cable customers for the quarter and added 601,000 data customers. The company now has more than 6 million video customers and 12 million data customers. U-verse profits were up 23.8% compared to a year earlier.

Verizon. The company added 114,000 new video customers and 162,000 new data customers for the quarter. The company now has 5.5 million video customers and 6.5 million data customers.

DirectTV. The company saw a decrease of 28,000 customers for the quarter while revenues grew by 6% due to rate increases. The average satellite bill is up to $107.27 per customer per month.

Netflix. Netflix added 1 milllion US subscribers and 2 million international subscribers for the quarter. They now have 37 million US customers and almost 16 million international ones. But these growth rates were less than their predictions and their stock tumbled 25% on the news.

Amazon Prime. The company does not report number of customers. But their earnings release says they gained significant customers even while increasing their annual fee from $79 to $99.

What does all of this mean? As can be seen by looking at all of the major players who make quarterly releases (companies like Cox do not), one can see that total video subs are down by maybe a net of 100,000 for the quarter. But cord cutting is growing when you consider that the industry used to routinely grow by 250,000 customers per quarter for now households being built. So it looks like cord cutting is growing by perhaps 1.5 million per year.

Within these numbers one can’t see the effects of cord shaving. It’s been widely reported that customers are downsizing their cable package as a way to save money. None of these companies report on their mix of types of customers.

Netflix and Amazon Prime continue to grow significantly along with other on-line content providers. It’s been reported that over half of the households in the country pay for at least one of the on-line services and many others watch free content available at Hulu and other sites.

One thing that is obvious is that broadband is still growing for all of the service providers. In fact, Comcast and other traditional cable providers are starting to refer to themselves more as ISPs than as cable companies.