A Doubling of Broadband Prices?

In what is bad news for consumers but good news for ISPs, a report by analyst Jonathan Chaplin of New Street Research predicts big increases in broadband prices. He argues that broadband is underpriced. Prices haven’t increased much for a decade and he sees the value of broadband greatly increased since it is now vital in people’s lives.

The report is bullish on cable company stock prices because they will be the immediate beneficiary of higher broadband prices. The business world has not really acknowledged the fact that in most US markets the cable companies are becoming a near-monopoly. Big telcos like AT&T have cut back on promoting DSL products and are largely ceding the broadband market to the big cable companies. We see hordes of customers dropping DSL each quarter and all of the growth in the broadband industry is happening in the biggest cable companies like Comcast and Charter.

I’ve been predicting for years that the cable companies will have to start raising broadband prices. The companies have been seeing cable revenues drop and voice revenues continuing to drop and they will have to make up for these losses. But I never expected the rapid and drastic increases predicted by this report. Chaplin sets the value of basic broadband at $90, which is close to a doubling of today’s prices.

The cable industry is experiencing a significant and accelerating decline in cable customers. And they are also facing significant declines in revenues from cord-shaving as customers elect smaller cable packages. But the cable products have been squeezed on margin because of programming price increases and one has to wonder how much the declining cable revenue really hurts their bottom line.

Chaplin reports that the price of unbundled basic broadband at Comcast is now $90 including what they charge for a modem. It’s even higher than that for some customers. Before I left Comcast last year I was paying over $120 per month for broadband since the company forced me to buy a bundle that included basic cable if I wanted a broadband connection faster than 30 Mbps.

Chaplin believes that broadband prices at Comcast will be pushed up to the $90 level within a relatively short period of time. And he expects Charter to follow.

If Chaplin is right one has to wonder what price increases of this magnitude will mean for the public. Today almost 20% of households still don’t have broadband, and nearly two-thirds of those say it’s because if the cost. It’s not hard to imagine that a drastic increase in broadband rates will drive a lot of people to use broadband alternatives like cellular data, even though it’s a far inferior substitute.

I also have to wonder what price increases of this magnitude might mean for competitors. I’ve created hundreds of business plans for markets of all sizes, and not all of them look promising. But the opportunities for a competitor improve dramatically if broadband is priced a lot higher. I would expect that higher prices are going to invite in more fiber overbuilders. And higher prices might finally drive cities to get into the broadband business just to fix what will be a widening digital divide as more homes won’t be able to afford the higher prices.

Comcast today matches the prices of any significant cable competitor. For instance, they match Google Fiber’s prices where the companies compete head-to-head. It’s not hard to foresee a market where competitive markets stay close to today’s prices while the rest have big rate increases. That also would invite in municipal overbuilders in places with the highest prices.

Broadband is already a high-margin product and any price increases will go straight to the bottom line. It’s impossible for any ISP to say that a broadband price increase is attributable to higher costs – as this report describes it, any price increases can only be justified by setting prices to ‘market’.

All of this is driven, of course, by the insatiable urge of Wall Street to see companies make more money every quarter. Companies like Comcast already make huge profits and in an ideal world would be happy with those profits. Comcast does have other ways to make money since they are also pursuing cellular service, smart home products and even now bundling solar panels. And while most of the other cable companies don’t have as many options as Comcast, they will gladly follow the trend of higher broadband prices.

Cable TV Number 2Q 2017

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You can’t read an article about the cable industry without hearing about the erosion of customers due to cord cutting. So I thought I would take a look at the cable customers claimed by the largest cable companies at the end of the second quarters of 2016 and 2017.

2Q 2016 2Q 2017 Change
Comcast 22,396,000 22,516,000 120,000 0.5%
DirecTV 20,454,000 20,856,000 402,000 2.0%
Charter 17,312,000 17,071,000 (241,000) -1.4%
Dish 13,593,000 11,892,000 (1,701,000) -12.5%
AT&T 4,869,000 4,666,000 (203,000) -4.2%
Verizon 4,637,000 3,853,000 (784,000) -16.9%
Cox 4,330,000 4,245,000 (85,000) -2.0%
Altice 3,639,000 3,463,000 (176,000) -4.8%
Frontier 1,340,000 1,007,000 (333,000) -24.9%
Mediacom 842,000 829,000 (13,000) -1.5%
WOW 524,300 458,200 (66,100) -12.6%
Cable ONE 338,974 297,990 (40,984) -12.1%
94,275,274 91,154,190 (3,121,084) -3.3%

These companies represent more than 95% of the whole TV market. According to Leichtman Research these companies together lost around 655,000 cable customers in the second quarter of this year.

What’s most striking about the above table is that the companies in aggregate lost 3.3% or over 3.1 million customers in the last year. One has to only go back two years to see the first instance of the industry losing customers, so these losses are recent. This is reminiscent to me to what happened to telephone landlines. The losses started very slowly, but then the rate of the decline picked up year after year. There is no way to know if cable will take the same path or if the drop in customers will be slower. But I think everybody in the industry from programmers to Wall Street is concerned about losses of this magnitude.

Interestingly, for now the big cable companies are largely maintaining earnings due to rate increases for the remaining cable customers plus continued growth in broadband customers. I’ll have a blog next week looking at the state of broadband.

There are a few interesting things to note in these numbers:

  • The losses in the second quarter of 2017 are actually smaller than the losses from that same quarter of 2016. But the year-over-year losses are significantly more now than they were in the year ending with 2Q 2016.
  • Satellite TV is getting clobbered. While DirecTV is higher, it’s offset to some extent by the loss of customers at parent AT&T which is shifting customers to the satellite platform. Dish networks is the big loser. Much of their customer losses have been offset by Sling TV adding over a million customers during the last year. But it’s rumored in the industry that Sling TV is operating at almost no margin.
  • Comcast continues to buck the rest of the industry and saw a tiny gain of customers over the last year.
  • When looking at these numbers you always must remember that the industry lost customers while there were around 1.5 million new residential living units build last year (homes and apartments). The gains that these companies got from those new homes, probably at least 1 million new customers is masked by the other losses, meaning that the industry lost over 4 million customers during the last year.
  • We know that the cable companies are continuing to take broadband customers from the telcos and there has to be some of that going on in these numbers.

 

Merger Madness

The last year was a busy one for mergers in the industry. We saw Charter gobble up Time Warner Cable and Bright House Networks. We saw CenturyLink buy Level 3 Communications. But those mergers were nothing like we see on the horizon right now. I can barely read industry news these days without reading about some rumored gigantic acquisitions.

There have always been mergers in the industry, but I can’t remember a time when there was this level of merger talk happening. This might be due in part to an administration that says it won’t oppose megamergers. It’s also being driven by Wall Street that makes a lot of money when they find the financing for a big merger. Here are just a few of the mergers being talked discussed seriously in the financial press:

Crown Castle and Lightower. This merger is already underway with Crown Castle paying $7.1 billion for Lightower. It matches up two huge fiber networks along with tower assets to make the new company the major player in the small cell deployment space, particularly in the northeast.

Discovery and Scripps. Discovery Communications announced a deal to buy Scripps Networks for about $11.9 billion. This reduces the already-small number of major programmers and Discovery will be picking up networks like the Food Network, HGTV, Travel Channel, the Cooking Channel and Great American Country.

Comcast, Altice and Charter. Citigroup issued a report that speculates that Comcast and Altice would together buy Charter and split the assets. Comcast would gain the former Time Warner cable systems with the rest going to Altice. There is also talk of Altice trying to finance the purchase of Charter on its own. But with Charter valued at about $120 billion while also carrying around $63 billion in debt that seems like a huge number to finance. This would be an amazing merger with the ink not yet dry on Charter’s merger with Time Warner.

Amazon and Dish Network. This makes sense because Amazon could finally help Dish capitalize on its 700 E-block and AWS-4 spectrum licenses. This network could be leveraged by Amazon to track trucks and packages, monitor the IoT and to control drones.

T-Mobile and Sprint. Deutsche Telecom currently owns 63% of T-Mobile and Softbank owns 82% of Sprint. A straight cashless merger would create an instantly larger company and gain major operational advantages. The FCC and the Justice Department nixed a merger between T-Mobile and AT&T a few years back, but in an environment where the cellular companies are getting into the wireless business this might sail through a lot easier today. Sprint has also been having negotiations for either a merger or some sort of partnership with Comcast and Charter.

Comcast and Verizon. There is also Wall Street speculation about Comcast buying Verizon. The big advantage would be to merge the Comcast networks with the Verizon Wireless assets. Comcast has a history of buying companies in distress and Verizon’s stock price has dipped 17% already this year. But this would still be a gigantic merger worth as much as $215 billion. There are also some major regulatory hurdles to overcome with the big overlap in the northeast between Comcast and the Verizon FiOS networks.

Big ISPs Want to be Regulated

I’ve always contended that the big ISPs, regardless of their public howling, want to be regulated. It is the nature of any company that is regulated to complain about regulation. For the last decade as AT&T and Verizon made the biggest telecom profits ever they have released press release after press release decrying how regulation was breaking their backs. The big telcos and cable companies spent the last few years declaring loudly that Title II regulation was killing incentives to make investments, while spending record money on capital.

A few months ago Comcast, Charter, and Cox filed an amicus brief in a lawsuit making its way through the US. Court of Appeals for the Ninth Circuit. In that brief they asked the federal appeals court to restore the Federal Trade Commission’s jurisdiction over AT&T. The specific case being reviewed had to do with deceptive AT&T marketing practices when they originally offered unlimited cellular data plans. It turns out that AT&T throttled customer speeds once customers reached the meager threshold of 3 – 5 GB per month.

In 2014 the FTC sued AT&T for the practice and that’s the case now under appeal. It’s a bit extraordinary to see big ISPs siding with the government over another ISP, and the only reason that can be attributed to the suit is that these companies want there to be a stable regulatory environment. In the brief the cable companies expressed the desire to “reinstate a predictable, uniform, and technology-neutral regulatory framework that will best serve consumers and businesses alike.”

That one sentence sums up very well the real benefit of regulation to big companies. As much as they might hate to be regulated, they absolutely hate making huge investments in new product lines in an uncertain regulatory environment. When a big ISP knows the rules, they can plan accordingly.

One scenario that scares the big ISPs is living in an environment where regulations can easily change. That’s where we find ourselves today. It’s clear that the current FCC and Congress are planning on drastically reducing the ‘regulatory burden’ for the big ISPs. That sounds like an ideal situation for the ISPs, but it’s not. It’s clear that a lot of the regulations are being changed for political purposes and big companies well understand that the political pendulum swings back and forth. They dread having regulations that change with each new administration.

We only have to go back a few decades to see this in action. The FCC got into and then back out of the business of regulating cable TV rates several times in the late 1970s and the 1980s. This created massive havoc for the cable industry. It created uncertainty, which hurt their stock prices and made it harder for them to raise money to expand. The cable industry didn’t become stable and successful until Congress finally passed several pieces of cable legislation to stop these regulatory swings.

Big companies also are not fond of being totally deregulated. That is the basis for the amicus brief in the AT&T case. The big ISPs would rather be regulated by the FTC instead of being unregulated. The FTC might occasionally slap them with big fines, but the big companies are smart enough to know that they have more exposure without regulations. If the FTC punishes AT&T for its marketing practices that’s the end of the story. But the alternative is for AT&T to have to fend off huge class action lawsuits that will seek damages far larger than what the FTC will impose. There is an underlying safety net by being regulated and the big ISPs understand and can quantify the risk of engaging in bad business practices.

In effect, as much as they say that hate being regulated, big companies like the safety of hiding behind regulators who protect them as much as they protect the public. It’s that safety net that can allow a big ISP to invest billions of capital dollars.

I really don’t think the FCC is doing the big ISPs any favors if they eliminate Title II regulations. Almost every big ISP has said publicly that they are not particularly bothered by the general principles of net neutrality – and I largely believe them. Once those rules were put into place the big companies made plans based upon those rules. The big ISPs did fear that some future FCC might use Title II rules to impose rate regulation – much as the disaster with the cable companies in the past. But overall the regulation gives them a framework to safely invest in the future.

I have no doubt that the political pendulum will eventually swing the other way – because it always does. And when we next get a democratic administration and Congress, we are likely to see much of the regulations being killed by the current FCC put back into place by a future one. That’s the nightmare scenario for a big ISP – to find that they have invested in a business line that might be frowned upon by future regulators.

Broken Promises by Big ISPs

One of the most frustrating things for regulators has to be when giant ISPs renege on regulatory deals they’ve negotiated and don’t follow through with their promises. Books could be written listing all of the times when big ISPs have promised to do something and then never did it.

I am reminded of one such deal when I read that New York City is suing Verizon over its broken promise to bring FiOS fiber to the city. The lawsuit states that almost a million households are still unable to get FiOS, although the company had promised full coverage when they got a franchise from the city in 2008. In that agreement Verizon promised to bring fiber service to the whole city by 2014. The agreement with the city required that Verizon bring fiber, in conduit, directly in front of, behind, or otherwise adjacent to every residential building in the City.

Verizon had a similar longstanding dispute with the State of Pennsylvania. Back in 2002 the company made a promise to bring DSL service to cover 80% of the state as a prerequisite for the company being relieved of a lot of regulatory oversight by the state. But Verizon never completed a lot of the needed upgrades and huge parts of rural Pennsylvania still didn’t have DSL a decade later.

I wrote a blog a few months back about Charter in New York. There the state had found that the cable modems deployed by the company were not technically capable of delivering anything close to the speeds that the company was advertising. Charter agreed to fix the problem, but five years later had made almost no upgrades and was recently sued by the State.

I could list more examples all day long and there have been disputes all across the country with major telcos and cable companies that have made deals with regulators and then either ignored the agreements or only implemented them in a half-hearted manner.

The problem is that there are really no regulatory penalties that are big enough to penalize an ISP for not doing what it promised. There have been fines levied, but those fines are never nearly as big as the profits or savings realized by the ISPs for ignoring the agreements with regulators. For example, it’s unlikely that lawsuits or penalties will be able to force Verizon to finish the FiOS build in New York City. I am sure the company built to the parts of NYC that made economic sense and decided, for whatever reason, that there is not sufficient payback to justify building to the remaining parts of the city.

And that’s what regulators fail to recognize – big ISPs make decisions based upon the anticipated return for stockholders. I think it’s likely that in many of these cases that the big ISPs had no intention of complying with their agreements from the start. The cynical side of me says that they are often willing to take the upsides associated with these kinds of deals – be that decreased regulation or the ability to complete a merger – while knowing up front that they are unlikely to ever complete whatever they have agreed to do.

I think we are likely to see another round of broken promises in a few years as we start moving towards the end of the FCC’s CAF II program. The big telcos accepted over $9 billion over six years to improve rural broadband to speeds of at least 10 Mbps. I’ve been getting feedback from a lot of areas in the country that those deployments seem to be behind schedule. It will certainly come as no surprise if one or more of the big telcos spends the CAF II funding without bringing broadband to the promised households, or else will deliver speeds under the promised levels. The FCC recently issued a warning to carriers telling them that it expects them to fulfill the CAF II commitments – and I suspect that warning is due to the same kind of rumblings I’ve been hearing.

But ultimately the FCC doesn’t really have any way to make these telcos complete the builds. They might withhold future funding from the telcos, but as the FCC keeps eliminating regulation it is going to have very little ability to enforce the original CAF II agreements or to take any steps to really penalize the telcos.

The saddest part of these various broken promises is that millions of real people get hurt. It’s been reported that there are significant pockets of residents in urban areas like New York City that still don’t have even one broadband provider. There are huge rural swaths of the country that are desperate for any kind of broadband, which is what CAF II is supposed to deliver for the first time. But I think we need to be realistic in that big ISPs often do not meet their promises – whether deliberately or not. And perhaps it’s finally time to stop making these big deals with companies that have a history of broken promises.

Quad Bundling

Since Comcast and Charter are now embarking in the cellular business we are soon going to find out if there is any marketing power in a quad bundle. Verizon, and to a smaller degree AT&T, has had the ability to create bundles including cellular service, but they never really pushed this in the marketplace in the way that Comcast is considering.

Comcast has said that the number one reason they are entering the cellular business is to make customers “stickier” and to reduce churn. And that implies offering cellular service cheaper than competitors like Verizon, or to at least create bundles that give the illusion of big savings on cellular. For now, the preliminary pricing Comcast has announced doesn’t seem to be low enough to take the industry by storm. But I expect as they gain customers that the company will find more creative ways to bundle it.

The Comcast pricing announced so far shows only a few options. Comcast is offering a $45 per month ‘unlimited’ cell plan (capped at 20 GB of data per month), that is significantly less expensive than any current unlimited plan from Verizon or AT&T. But this low price is only available now for customers who buy one of the full expensive Comcast triple play bundles. The alternative to this is a $65 per month unlimited plan that is $5 per month lower than the equivalent Verizon plan. Comcast also plans to offer family plans that sell a gigabyte of data for $12 that can be used for any phone in the plan – for many families this might be the best bargain.

One interesting feature of the Comcast plan is that it will automatically offload data traffic to the company’s WiFi network. Comcast has a huge WiFi network with over 16 million hotspots. This includes a few million outdoor hotspots but also a huge network of home WiFi routers that also act as a public hotspot. That means that customers sitting in a restaurant or visiting a home that has a Comcast WiFi connection will automatically use those connections instead of using more expensive cellular data. Depending on where a person lives or works this could significantly lower how much a consumer uses 4G data.

There are still technical issues to be worked out to allow for seamless WiFi-to-WiFi handoffs. Comcast has provided the ability for a few years for customers to connect to their WiFi hotspots. I used to live in a neighborhood that had a lot of the Comcast home hotspots. When walking my dog it was extremely frustrating if I let my cellphone use the Comcast WiFi network because as I went in and out of hotspots my data connections would be interrupted and generally reinitiated. I always had to turn off WiFi when walking to use only cellular data. It will be interesting to see how, and if Comcast has overcome this issue.

A recent survey done by the investment bank Jeffries has to be of concern to the big four cellular companies. In that survey 41% of respondents said that they would be ‘very likely’ to consider a quad play cable bundle that includes cellular. Probably even scarier for the cellular companies was the finding that 76% of respondents who were planning on shopping for a new cell plan within the next year said they would be open to trying a cellular product from a cable company.

I wrote recently about how the cellular business has entered the phase of the business where cellular products are becoming a commodity. Competition between the four cellular companies is already resulting in lower prices and more generous data plans. But when the cable companies enter the fray in all of the major metropolitan areas the competition is going to ratchet up another notch.

The cable companies will be a novelty at first and many customers might give them a try. But it won’t take long for people to think of them as just another cellular provider. One thing that other surveys have shown is that people have a higher expectation for good customer service from a cellular provider than they do for the cable companies. If Comcast is going to retain cellular customers then they are either going to have to make the bundling discounts so enticing that customers can’t afford to leave, or they are going to have to improve their customer service experience.

Even if Comcast and Charter have only modest success with cellular, say a 10% market share, they will hurt the other cellular companies. The number one driver of profits in the cellular business is economy of scale – something you can see by looking at the bottom line of Sprint or T-Mobile compared to Verizon or AT&T. If Comcast is willing to truly use cellular to help hang on to other customers, and if that means they don’t expect huge profits from the product line, then they are probably going to do very well with a quad play product.

And of course, any landline ISP competing against Comcast or Charter has to be wary. If the cellular products work as Comcast hopes then it’s going to mean it will be that much harder to compete against these companies for broadband. Bundled prices have always made it hard for customers to peel away just one product and the cable companies will heavily penalize any customers that want to take only their data product elsewhere.

Industry Shorts, June 2017

Following are some topics I found of interest but which don’t justify a whole blog.

Amazon Bringing Alexa to Settop Boxes. Amazon has created a develop kit that would allow any settop box maker to integrate their voice service Alexa. The Alexa voice platform is currently supporting the popular Echo home assistant device. It’s also being integrated into some new vehicles and Amazon has made it available for integration into a whole range of home automation devices. The Amazon Alexa platform is currently ahead of the competitors at Apple, Google and Microsoft mostly due to having made the product open to developers who have already created over 10,000 applications that will work on the platform. Adding Alexa to a settop box could make it a lot easier to use the settop box as the hub for a smart home.

Comcast Tried to Shut Down anti-Comcast Website. LookingGlass Cyber Security Center, a vendor for Comcast, sent a cease-and-desist letter to the advocacy group Fight for the Future. This group is operating a website called comcastroturf.com. The advocacy group claims that Comcast has used bots to generate over a half million fake filings to the FCC in the network neutrality docket. These comments were all in favor of killing net neutrality and the group claims that Comcast used real people’s names to sign the filings, but without their permission. The website allows people to see if their name has been used. The cease-and-desist order was withdrawn after news of it got a lot of coverage in social media.

Net Neutrality Wins in Court. Not that it probably makes much difference now that the FCC is trying to undo Title II regulation, but the challenge filed by Verizon and other large ISPs against the FCC’s net neutrality decision was rejected at appeal. This affirms the ability of the FCC to use Title II rules for regulating broadband. The full U.S. Court of Appeals for the D.C. Circuit upheld an earlier court ruling that affirmed the FCC had the needed authority to implement the net neutrality decision.

Altice Buys Ad-Tech Company. Altice joins other big ISPs that want to take advantage of the end of the new FCC rules that allows ISPs to monetize customer’s private data. Altice, which is now the fourth largest US cable company after the acquisition of Cablevision, now joins the other big ISPs who have added the expertise to slice and dice customer data. Altice paid $300 million for Teads, a company specializing in targeting advertising based upon customer specific data.

Other large ISPs are already poised to take advantage of the new opportunity. For example, Verizon’s purchase of AOL and Yahoo brings this same expertise in-house. It has been widely speculated that the ISPs have been gathering customer data for many years and so are sitting on a huge treasure trove detailing customers web browsing usage, on-line purchasing habits, email and text information, and for the wireless ISPs the location data of cellphones.

Charter Rejects $100 Billion offer from Verizon. The New York Post reported that Charter rejected a purchase offer from Verizon. The Post reports that Charter thought the offer wasn’t high enough. It also came with some tax implications that would complicate the deal. Whether this particular offer is real or not, it points to the continuing consolidation of the industry ISPs, cable providers and cellular companies. The current administration is reportedly not against large mergers, so there’s no telling what other megadeals we might see over the next few years.

Top 7 Media CEOs made $343.8 Million in 2016. The CEOs of CBS, Comcast, Discovery Communications, Disney, Fox, Time Warner and Viacom collectively made a record salary last year, up 21.1% from 2015. It’s interesting in a time when the viewership of specific cable networks is dropping rapidly that the industry would be rewarding their leaders so handsomely. But all of these companies are compensating for losses of customers with continuing rate hikes for programming and most are having banner earnings.

Frontier Lays Off WV Senate President. Frontier just laid off Mitch Carmichael, the President of the Senate in West Virginia. This occurred right after the Senate passed a broadband infrastructure bill that was aimed at bringing more broadband competition to the state. The bill allows individuals or communities to create broadband cooperatives to build broadband infrastructure in areas with poor broadband coverage. Frontier is the predominant ISP in the state after its purchase of the Verizon property there. The West Virginia legislature is a part-time job that pays $20,000 per year and most legislators hold other jobs. West Virginia is at or near the bottom in most statistics concerning broadband speeds and customer penetration rates.

Latest Industry Statistics

The statistics are out for the biggest cable TV and data providers for the first quarter of the year and they show an industry that is still undergoing big changes. Broadband keeps growing and cable TV is starting to take some serious hits.

Perhaps the most relevant statistic of all is that there are now more broadband customers in the country than cable TV customers. The crossover happened sometime during the last quarter. This happened a little sooner than predicted due to plunging cable subscribers.

For the quarter the cable companies continued to clobber the telcos in terms of broadband customers. Led by big growth in broadband customers at Comcast and Charter the cable companies collectively added a little over 1 million new broadband customers for the quarter. Charter led the growth with 458,000 new broadband subscribers with Comcast a close second at 430,000 new customers.

Led by Frontier’s loss of 107,000 broadband customers for the quarter the telcos collectively lost 45,000 net customers for the quarter. Most of Frontier’s losses stem from the botched acquisition of Verizon FiOS properties. Verizon lost 27,000 customers for the quarter while AT&T U-verse was the only success among telcos adding 90,000 new customers for the quarter.

Looking back over the last year the telcos together lost 727,000 broadband customers while the cable companies together gained 3.11 million customers during the same period. The cable companies now control 63.2% of the broadband market, up from 61.5% of the market a year ago.

Overall the broadband market grew by 2.38 million new broadband subscribers for over the last year ending March 31. It’s a market controlled largely by the giant ISPs and the largest cable companies and telcos together account for 93.9 million broadband subscribers.

Cable TV shows a very different picture. The largest seven cable providers collectively lost 487,000 video subscribers for the quarter. That includes AT&T losing 233,000, Charter losing 100,000, Dish Networks losing 143,000, Verizon losing 13,000, Cox losing 4,000 and Altice losing 35,000. The only company to gain cable subscribers was Comcast, which gained 41,000.

Total industry cable subscriber losses were 762,000 for the quarter as smaller cable companies and telcos are also losing customers. That is five times larger than the industry losses of 141,000 in the first quarter of last year. This industry is now losing 2.4% of the market per year, but that r is clearly accelerating and will probably grow larger. The annual rate of decline is already significantly higher than last year’s rate of 1.8%.

At this point it’s clear that cord cutting is picking up steam and this was the worst performance ever by the industry.

The biggest losers have stories about their poor performance. Charter says it is doing better among its own historic customers but is losing a lot of customers from the Time Warner acquisition as Charter raises rates and does away with Time Warner promotional discounts. AT&T has been phasing out of cable TV over its U-Verse network. This is a DSL service that has speeds as high as 45 Mbps, but which is proving to be inadequate to carry both cable TV and broadband together. Dish Networks has been bogged down in numerous carriage and retransmission fights with programmers and has had a number of channels taken off the air.

But even considering all of these stories it’s clear that customers are leaving the big companies. Surveys of cord cutters show that very few of them come back to traditional cable after cutting the cord after they get used to getting programming in a different way.

What is probably most strikingly different about the numbers is that for years the first quarter has performed the best for the cable industry, which in recent years has still seen customer gains even while other quarters were trending downward. We’ll have to see what this terrible first quarter means for the rest of 2017.

 

 

The End of Data Privacy?

Congress just passed a law that reverses the privacy rules that were ordered by the prior FCC. Those rules were recently put on hold by the current FCC and this new laws makes sure the privacy rules never go into effect. Congress did this to ensure that a future FCC cannot implement privacy rules without Congressional approval. It’s important to note that this law applies equally to both terrestrial and cellular broadband.

On paper this law doesn’t change anything since the FCC privacy rules never went into effect. However, even before the prior FCC adopted the privacy rules they had been confronting ISPs over privacy issues which kept the biggest ISPs from going too far with using customer data. Just the threat of regulation has curbed the worst abuses.

How will the big ISPs be likely to now use customer data? We don’t have to speculate too hard because some of them have already used customer data in various ways in the recent past, all of which seem to be allowable under this new law.

Selling Data to Marketers. This is the number one opportunity for big ISPs. Companies like Facebook and Google have been mining customer data, but they can only do that when somebody is inside their platforms – they have no idea what else you do outside their domains. But your ISP can know every keystroke you make, every email your write, every website you visit, and with a cellphone, every place you’ve been. With deep data mining ISPs can know everything about your on-line life.

We know some of the big ISPs have already been mining customer data. For example, last year AT&T offered to sell connections that were not monitored for a premium price. AT&T also has a product that has been selling masses of customer phone and data usage to federal and local law enforcement. Probably other ISPs have been doing this as well, but this has been a well-guarded secret.

Inserting Ads. This is another big revenue opportunity for the ISPs. The companies will be able to create detailed profiles of customers and then sell targeted advertising to reach specific customers. Today Google and a few other large advertising companies dominate the online advertising business of inserting ads into web sites. With the constraints off, the big ISPs can enter this business since they will have better customer profiles than anybody else. We know that both AT&T and Charter have already been doing this.

Hijacking Customer Searches. Back in 2011 a bunch of large ISPs like Charter, Frontier and others were caught hijacking customer DNS searches. When customers would hit buttons on web sites or on embedded links in articles the ISPs would sometimes send users to a different web site than the one they thought they were selecting. The FCC told these companies to stop the practice then, but the new law probably allows the practice again.

Inserting Supercookies. Verizon Wireless inserted Supercookies on cellphones back in 2014. AT&T started to do this as well but quickly backed off when the FCC came down hard on Verizon. These were undetectable and undeletable cookies that allowed the company to track customer behavior. The advantage of the supercookies is that they bypass most security schemes since they grab customer info before it can be encrypted or sent through a secure connection. For example, this let the company easily track customers with iPhones.

Pre-installing Tracking Software on Cellphones. And even better than supercookies is putting software on all new phones that directly snags data before it can be encrypted. AT&T, T-Mobile and Sprint all did this in the past – just using a different approach than supercookies. The pre-installed software would log things like every website visited and sent the data back to the cellular carriers.

The State of New York vs. Charter

Scale_of_justice_2_newEvery once in a while in this industry you come across a story about one of the big cable companies that just makes you shake your head. There is such a story right now where the New York State attorney general, Eric Schneiderman, has sued Charter on behalf of its 2.5 million data customers in the state.

The issue goes back to 2012 when the company was still Time Warner Cable. At that time there were a lot of complaints from customers saying that they were not getting the data speeds they were paying for. In 2013, in association with Internet speed tests conducted by the FCC, it was determined that Time Warner had widely deployed cable modems and WiFi routers that were not capable of delivering speeds of even 20 Mbps.

In July of 2013, Time Warner promised the FCC that it would replace and upgrade all customer modems in the state and would also make other system upgrades that would increase speeds, such as reducing the size of the neighborhood nodes.

Here is where the puzzling part comes in. The FCC never retested, which is normal, and instead relied on Time Warner’s promise that they would fix the problems and increase speeds. But it turns out that Time Warner didn’t make any of the promised upgrades. They didn’t replace customer modems. In fact, they routinely recycled the bad modems back into service when they were returned by customers.

Since then Time Warner (and now Charter) has advertised even faster speeds, yet none of the customer modems are able to deliver the speeds that the company is selling. The lawsuit says there are now over 250,000 customers who are paying for speeds between 200 Mbps and 300 Mbps, but who still have the old inadequate modems that get speeds under 20 Mbps.

To add insult to injury, the company has been charging $10 per month to customers to lease the old modems (at least that’s the current lease rate). Considering that these modems don’t generally cost the cable company even $100, these customers have paid enough to have replaced these modems multiple times since the problem was first caught.

Time Warner is also being accused in the lawsuit of manipulating the FCC speed tests in 2013 to show faster results. They did this by taking speed tests at times when there was not much demand on their networks, like the middle of the night.

Finally, the company has been accused of purposefully providing inadequate backbone so that Internet traffic was delayed and slowed down getting onto their network. This means they did not provide big enough data connections to the outside world for things like Netflix or for general Internet access.

Here is the lawsuit filing. It’s an interesting and easy read and is not overly technical. I know that big companies hate to spend capital dollars that they don’t think are necessary. But in this case they got caught providing old and inadequate modems five years ago and since then did nothing to fix the problems. We know from experience that even when companies are caught like this that they don’t usually undertake a crash repair program. But if Time Warner would have implemented some reasonable plan to upgrade the network and to replace the bad modems over time there probably would not be this big lawsuit today. What’s puzzling is how the whole management chain at the company decided to do nothing. They denied a direct FCC order and also continued to get piles of customer complaints.

The lawsuit does not name a specific amount of damages, but one has to think it’s going to be a big number. The lawsuit asks for ‘injunctive and equitable relief’, meaning the return of customer payments, as well as civil penalties, meaning extra damages. If Charter has the same kind of customer penetrations we see elsewhere with cable companies – 60% to 70% of the market – it’s going to be interesting to see how they find a jury for this trial.