Hidden Fees Adding Up

Consumer Reports recently published a special report titled “What’s the Fee?: How Cable Companies Use Hidden Fees to Raise Prices and Disguise the True Cost of Service”. Cable companies have advertised prices for many years that are significantly lower than the actual bills customers see – but the CR report shows that the size of the fees has grown significantly over the last few years.

The report lists several specific examples. For example, the broadcast fee and the regional sports fees at Comcast increased from $2.50 in 2015 to $18.25 currently. The broadcast fee supposedly covers the cost of buying local network channels – ABC, CBS, FOX, and NBC. The regional sports fee can cover the cost of channels carrying regional college and pro sports. In both cases, the cable companies never disclose the actual fees they pay that are covered by these fees.

The report shows that Charter increased its broadcast fee three times in the last year, starting at $8.85 in October 2019 to reach $13.50 per month in October 2019.

It’s not hard to understand why customers are confused by the many fees. The report points out that some cable bills have more than a dozen line items, which are a mix of rates for products, external taxes and fees, and these various ‘hidden’ fees – meaning they are usually not disclosed when advertising the products.

In addition to the Broadcast TV fee and the Regional sports fees the report lists the following other fees:

  • Settop box rental fee. This is to recover the cost of the settop box hardware. For many years this fee was around $5 monthly for most cable providers, but this is an area that has also seen big price increases in recent years and the highest rate I’ve seen was $12 per month. This is to recover a settop box, which for small ISPs costs a little over $100, and must cost less for the big cable companies.
  • Cable Modem / WiFi Router. This is the fee with perhaps the biggest range of pricing – some ISPs don’t charge for this while others are charging more than $10 per month.
  • HD Technology Fee. This fee used to be charged by almost every cable company back when they started offering HD channels (a decade ago many channels were offered in both an HD and an analog format). Now that the whole industry has largely gone to digital programming, CR reports the only company still charging this fee is Comcast.
  • Internet Service Fees. This is a relatively new fee that gets billed to anybody buying Internet Access. The report highlights the fees charged by RCN and Frontier.
  • Administrative and Other Fees. These are often fees under various names that don’t cover any specific costs. However, some fees are specific – I just read an article describing a $7 fee to business customers by AT&T in California to recover property taxes.

Consumer Reports collected a number of sample bills from customers and reports that the average monthly company-imposed fees for the bills they analyzed averaged to $22.96 for AT&T U-verse, $31.28 for Charter, $39.59 for Comcast, $40.16 for Cox, and $43.79 for Verizon FiOS. They estimate that these fees could total to at least $28 billion per year nationwide.

To be fair to the cable providers, these fees are not all profits. The companies pay out substantial retransmission fees for local content and pay a lot for sports programming. However, some of the fees like settop box and modem rentals are highly profitable, generating revenues far above the cost of the hardware. Some of the fees like administrative fees are 100% margin for the companies.

Consumer Reports advocates for legislation that would force cable companies and ISPs to fully disclose everything on bills, similar to what happened with the airline industry in 2011 with the Full Fare Advertising Rule. CR believes that the FCC has the authority to require such transparency without legislation.

Do Cable Companies Have a Wireless Advantage?

The big wireless companies have been wrangling for years with the issues associated with placing small cells on poles. Even with new FCC rules in their favor, they are still getting a lot of resistance from communities. Maybe the future of urban/suburban wireless lies with the big cable companies. Cable companies have a few major cost advantages over the wireless companies including the ability to bypass the pole issue.

The first advantage is the ability to deploy mid-span cellular small cells. These are cylindrical devices that can be placed along the coaxial cable between poles. I could not find a picture of these devices and the picture accompanying this article is of a strand-mounted fiber splice box – but it’s s good analogy since the size and shape of the strand-mounted small cell device is approximately the same size and shape.

Strand-mounted small cells provide a cable company with a huge advantage. First, they don’t need to go through the hassle of getting access to poles and they avoid paying the annual fees to rent space on poles. They also avoid the issue of fiber backhaul since each unit can get broadband using a DOCSIS 3.1 modem connection. The cellular companies don’t talk about backhaul a lot when they discuss small cells, but since they don’t own fiber everywhere, they will be paying a lot of money to other parties to transport broadband to the many small cells they are deploying.

The cable companies also benefit because they could quickly deploy small cells anywhere they have coaxial cable on poles. In the future when wireless networks might need to be very dense the cable companies could deploy a small cell between every pair of poles. If the revenue benefits of providing small cells is great enough, this could even prompt the cable companies to expand the coaxial network to nearby neighborhoods that might not otherwise meet their density tests, which for most cable companies is to only build where there are at least 15 to 20 potential customers per linear mile of cable.

The cable companies have another advantage over the cellular carriers in that they have already deployed a vast WiFi network comprised of customer WiFi modems. Comcast claims to have 19 million WiFi hotspots. Charter has a much smaller 500,000 hotspots but could expand that count quickly if needed. Altice is reportedly investing in WiFi hotspots as well. The big advantage of WiFi hotspots is that the broadband capacity of the hotspots can be tapped to act as landline backhaul for cellular data and even voice calls.

The biggest cable companies are already benefitting from WiFi backhaul today. Comcast just reported to investors that they added 204,000 wireless customers in the third quarter of 2019 and now have almost 1.8 million wireless customers. Charter is newer to the wireless business and added 276,000 wireless customers in the third quarter and now has almost 800,000 wireless customers.

Both companies are buying wholesale cellular capacity from Verizon under an MVNO contract. Any cellular minute or cellular data they can backhaul with WiFi doesn’t have to be purchased from Verizon. If the companies build small cells, they would further free themselves from the MVNO arrangement – another cost savings.

A final advantage for the cable companies is that they are deploying small cell networks where they already have a workforce to maintain the network. Bother AT&T and Verizon have laid off huge numbers of workers over the last few years and no longer have the fleets of technicians in all of the markets where they need to deploy cellular networks. These companies are faced with adding technicians where their network is expanding from a few big-tower cell sites to vast networks of small cells.

The cable companies don’t have nearly as much spectrum as they wireless companies, but they might not need it. The cable companies will likely buy spectrum in the upcoming CBRS auction and the other mid-range spectrum auctions over the next few years. They can use the 80 MHz of free CBRS spectrum that’s available everywhere.

These advantages equate to a big cost advantage for the cable companies. They save on speed to market and avoid paying for pole-mounted small cells. Their networks can provide the needed backhaul for practically free. They can offload a lot of cellular data through the customer WiFi hotspots. And the cable companies already have a staff to maintain the small cell sites. At least in the places that have aerial coaxial networks, the cellular companies should have higher margins than the cellular companies and should be formidable competitors.

How Smart are Promotional Rates?

I think the big ISPs are recognizing the impact that special promotion rates have on their bottom line. Promotional pricing is the low rates that cable companies offer to new customers to pry them away from the competition. Over the years promotional rates have also become the tool that cable companies use to retain customers. Most customers understand that they have to call the cable company periodically to renegotiate rates – and the big ISPs have routinely given customers a discount to keep them happy.

We’re finally seeing some changes with this practice. When Charter bought Time Warner Cable they found that Time Warner had over 90,000 ‘special’ pricing plans – they routinely negotiated separately with customers when they bought new service or renegotiated prices. Charter decided to end the practice and told most former Time Warner customers that they had to pay the full price at the end of their current contract period.

We’ve seen the same thing with AT&T and DirecTV. The company decided last year to eliminate the special discount on DirecTV and DirecTV Now. When the discount period ends for those products the company moves rates to the full list price and refuses to renegotiate. The practice cost AT&T almost a million customers just in the first quarter of this year. But AT&T says that they are glad to be rid of customers that are not contributing to the bottom line of the company. I’ve seen where the CEOs or other big ISPs like Comcast have said that they are considering changes in these practices.

At CCG we routinely examine customer bills from incumbent ISPs as part of the market research of helping ISPs entering new markets. While our examination of customer bills has never reached the level of equating to a statistically valid sample, I can report that the vast majority of bills we see have at least some level of discount. In some markets it’s rare to find a customer bill with no discount.

The discounts must accumulate to a huge loss of revenue for the big ISPs. The big ISPs all know that one of the only ways they are going to be profitable in the future is to raise broadband rates every year. The growth of broadband customers overall is slowing nationwide since most homes have broadband, although Charter and Comcast are still enjoying the migration of customers off DSL. The ISPs are continuing to lose revenues and margins as they lose cable and landline voice customers. Most US markets are seeing increased competition in broadband services for businesses and large MDUs. There’s not much left other than to raise residential broadband rates if the big ISPs want to satisfy the revenue growth expected by Wall Street.

If the big ISPs phased out promotional discounts it would probably equate to a 5% to 10% revenue increase. This is something that is becoming easier for a cable company to do. Many of them have already come to grips with cord cutting, and many are no longer fighting to keep cable customers. Cable companies are also less worried over time about customers leaving them to go back to DSL – a choice that is harder for consumers to make as the household need for broadband continues to climb.

Most ISPs won’t make a loud splash about killing discounts but will just quietly change policies. After a few years, I would expect customer expectations will reset after they realize that they can no longer extract discounts by threatening to drop service.

I’ve always advised my fiber overbuilder customers to not play this game. I ask clients if they really want to fight hard to win that slice of the market of customers that will change ISPs for a discount. Such customers flop back and forth between ISPs every two years, and in my opinion, companies are better off without such customers. Churn is expensive, and it’s even more expensive if an ISP provides a substantial discount to stop a customer from churning. Not all of my client agree with this philosophy, but if the big ISPs stop providing promotional discounts, then over time the need to do this for competitors will lessen.

This is certainly a practice I’d love to see slip into history. I’ve never liked it as a customer because I despise the idea of having to play the game of renegotiating with an ISP every few years. I’ve also hated this as a consultant. Too many times I’ve seen clients give away a huge amount of margin through these practices, giving away revenue that is needed to meet their forecasts and budgets. It’s dangerous to let marketing folks determine the bottom line because they’ve never met a discount they don’t like – particularly if they can make a bonus for selling or retaining customers.

The End of Customer Discounts?

When we’re working on broadband feasibility studies, one of the things we try to do is to get a sample of customer bills. We’ve found that the amount that the big ISPs charge for service differs by market and that the difference is usually manifested through promotional discounts given to customers. We’ve seen some markets where a majority of customers have discounts and others where it’s a far smaller percentage. Understanding the level and extent of discounts is another useful data point to have when considering competing in a market.

It sounds like the biggest proponent of special pricing was Time Warner Cable. CEO Tom Rutledge of Charter says that at the time of the merger with Time Warner, that the company had over 90,000 different customer packages due to deals that had been negotiated between customers and customer service reps. Charter is ending the Time Warner discounts when promotional periods end and asking customers to pay full price. They are not trying to keep customers who threaten to leave.

Charter is not the only company that is ending discounts. AT&T and DirecTV have been shedding hundreds of thousands of cable customers in the most recent quarters as the company has decided to let go of customers who refuse to pay the full price after the end of a promotional discount period. AT&T has decided they’d rather not keep customers if they aren’t contributing to the company’s margin.

The impact of ending customer discount can be huge. I recently analyzed a city where it seems that most of the customers had discounts that ranged from 15% to nearly 50% of the total bill. In many cases, the discounts are as great or greater than the profit margin on cable and I’ve always wondered why the cable companies offered such deep discounts.

One cause of big discounts historically came from the win-back programs offered by big ISPs. Anybody who has tried to quit service with an ISP is familiar with being handed to a win-back representative who is authorized to offer discounts to get customers to stay. These reps earned commissions for retaining customers and were usually liberal with the offered discounts.

Customers losing discounts on cable TV face a few stark choices. They can agree to pay a lot more to keep the same service. They can cut the cord and drop cable TV, but in doing so they face a second financial penalty of losing the bundling discount they had for buying multiple services. A third option is to step down to a lower-cost cable package. For example, Charter now offers an online small cable line-up called Spectrum TV Essentials that provides 60 channels for $15 per month. Most of the cable companies are offering similar small lineups.

We got a glimpse at cable TV margins recently when the Wall Street analyst firm Cowan looked at the cable market. They estimated that the Comcast has the gross highest margin on cable TV at 40% (cable rates less programming costs) followed by Charter and Dish Networks at 35%. They estimated that the margins for smaller cable companies like Altice are only 20%.

I was always surprised by some of the discounts I saw on bills because some of the bigger discounts looked to be giving away all of the margin on the cable product. Now that I see the estimates by Cowan of gross margins, in some cases, employees at these companies were giving away discounts larger than the margin.

I’ve wondered for years when the big companies were going to wake up and end the discounts and associated practices. The cable companies have largely won the battle against DSL and in most markets they have no effective competition. DSL seems to be keeping customers that care about price more than speed and the cable companies are getting the higher-margin customers. Cable broadband has become so much better than DSL that it’s getting hard to imagine that many customers will willingly go back to DSL.

Only the cable companies are going to know the math but eliminating most promotional discounts ought to be equivalent to implementing a 5% to 10% overall rate increase. Customers breaking the bundle will add even more to margins. Customers need to get used to the idea of paying full price after their initial discount period is over. I have to wonder when the cable companies will stop offering promotional discounts to get new customers in non-competitive markets.

Broadband Subscriptions Continue to Grow

According to the Leichtman Research Group, the biggest ISPs added 945,000 broadband customers in the first quarter of 2019. If sustained that would be an annual growth rate of 4% for the year. That contrasts drastically with the largest cable providers that are now losing cable customers at a rate of 6% annually.

The table below shows the changes in broadband customers for the largest ISPs for the quarter.

4Q 2018 Added % Change
Comcast 27,597,000 375,000 1.4%
Charter 25,687,000 428,000 1.7%
AT&T 15,737,000 36,000 0.2%
Verizon 6,973,000 12,000 0.2%
Cox 5,100,000 40,000 0.8%
CenturyLink 4,806,000 (6,000) -0.1%
Altice 4,155,000 36,900 0.9%
Frontier 3,697,000 (38,000) -1.0%
Mediacom 1,288,000 24,000 1.9%
Windstream 1,032,400 11,400 1.1%
Consolidated 780,720 1,750 0.2%
WOW 765,900 6,300 0.8%
Cable ONE 678,385 15,311 2.3%
Cincinnati Bell 426,700 1,100 0.3%
98,724,105 943,761 1.0%

The two biggest cable companies, Charter and Comcast are growing furiously and added 85% of all of the net industry additions, with Charter growing at an annual growth rate of almost 7%. Mediacom and Cable ONE grew even faster for the quarter.

The cable companies continue to dominate the telcos. As a whole, the big cable companies added over 925,000 customers at an annual growth rate of 5.75%. By contrast, the big telcos collectively added 18,250 customers, an annual growth rate of only 0.2%. We know that telcos are continuing to lose DSL customers, so a slight gain as a group means they are finding new customers to replace lost DSL connections.

The overall net gains for the first quarter of 2018 was 815,000. The increases are larger this year due to smaller losses by the telcos rather than faster growth for the cable companies. Perhaps a few of the telcos are finally seeing some upside by the rural CAF II builds.

The surprising statistic is how much Comcast and Charter continue to grow. They are obviously winning the broadband battle in the major cities and continue to take customers away from telco DSL on copper.

There has to be something else behind this kind of growth. A few years ago, there were analysts that predicted that the broadband market was topping out. It seemed like everybody who wanted broadband had it and that there were not a lot of potential customers left in the market. In the last two years we’ve seen continued growth similar to this last quarter.

It’s always hard to identify trends when looking at a nationwide trend, but one of the few ways to explain this continued growth is that more households are deciding that they must have broadband. That might mean homes with occupants older than 65, since that demographic always trailed other demographics in broadband acceptance. It might mean more houses with low incomes are finding a way to buy broadband because they’ve decided it is a necessity. At least some of this growth is coming by the effort to extend broadband into rural America, although that effort is largely being done by ISPs that are not on the above list.

Cord Cutting Picking Up Pace

Leichtman Research Group has published the cable TV customer counts for the first quarter of 2019 and it’s apparent that the rate of cord cutting is accelerating. These large companies represent roughly 95% of the traditional cable market.

1Q 2019 2,018
Customers Change % Change Losses
DirecTV / AT&T 22,383,000 (543,000) -2.4% (1,189,000)
Comcast 21,866,000 (120,000) -0.5% (371,000)
Charter 16,431,000 (145,000) -0.9% (244,000)
Dish TV 9,639,000 (266,000) -2.7% (1,125,000)
Verizon 4,398,000 (53,000) -1.2% (168,000)
Cox 3,980,000 (35,000) -0.9% (115,000)
Altice 3,297,300 (10,200) -0.3% (98,000)
Frontier 784,000 (54,000) -6.4% (123,000)
Mediacom 764,000 (12,000) -1.5% (45,000)
Cable One 320,611 (11,500) -3.5% (37,465)
83,862,911 (1,249,700) -1.5% (3,515,465)

A few things strike me about this table. First, the annual rate of loss is now 6%. That’s faster than we ever saw for telephone landlines which lost 5% annually at the peak of the market losses. We are only into the third real year of cord cutting and already the rate of customer growth has leaped to a 6% annual loss.

The other big striking number is that the overall traditional cable penetration rate has now dropped to 70%. According to the Census, there are 127.59 million households and adding in the customers of smaller providers shows a 70% market penetration. That’s still a lot of homes with traditional cable TV, but obviously the conversation about cutting the cord is happening in huge numbers of homes.

Another interesting observation is that AT&T is now at the top of the list. They’ve stopped reporting customers separately for DirecTV and for AT&T U-verse, which combined makes them the large cable provider in the country. However, at the rate the company is bleeding traditional cable customers, Comcast is likely to be number one again by the end of this year. AT&T has been encouraging customers to shift to DirecTV Now, delivered only online. However, that service also lost 83,000 customers in the first quarter, so the overall AT&T losses are staggering, at an annual rate of loss of over 8%.

The big losers in total customers are still the satellite companies. As those companies have gotten more realistic about pricing they’ve seen customer flee. There have been numerous articles in the press in publications like Forbes wondering if Dish Networks is even a viable company after these kinds of losses. There is also recent speculation that AT&T might spin off DirecTV and perhaps even merge it with Dish Networks.

The biggest percentage loser is Frontier, losing 6.4% of their customers in just the first quarter. It’s been obvious that the wheels are coming off of Frontier and the company just sold off properties in western states last month in order to raise cash.

For the last few years, Comcast and Charter were still holding on to overall cable customers. This was mostly buoyed by new cable customers that came from big increases in broadband customers – these two companies have added the bulk of new nationwide broadband customers over the last two years. But even with continued broadband growth, these companies are now seeing cable counts drop, and it’s likely that their rate of cord cutting among customers they’ve had for many years is probably as high as the rest of the industry.

It’s still hard to predict the trajectory of cable TV. In just two years the industry as a whole has gone from minor customer losses to losing customers at a rate of 6% per year. I don’t see any analysts predicting where this will bottom out – will it level off or will losses continue to accelerate? In any event, any industry losing 6% of customers annually is in trouble. It’s not going to take many years of losses at this rate for the industry to become irrelevant.

What’s the Future for CenturyLink?

I don’t know how many of you watch industry stock prices. I’m certainly not a stock analyst, but I’ve always tracked the stock prices of the big ISPs as another way to try to understand the industry. The stock prices for big ISPs are hard to compare because every big ISP operates multiple lines of business these days. AT&T and Verizon are judged more as cellular companies than as ISPs. AT&T and Comcast stock prices reflect that both are major media companies.

With that said, the stock price for CenturyLink has performed far worse than other big ISPs over the last year. A year ago a share of CenturyLink stock was at $19.24. By the end of the year the stock price was down to $15.44. As I wrote this blog the price was down to $10.89. That’s a 43% drop in share price over the last year and a 30% drop since the first of the year. For comparison, following are the stock prices of the other big ISPs and also trends in broadband customers:

Stock Price 1 Year Ago Stock Price Now % Change 2018 Change in Broadband Customers
CenturyLink $19.24 $10.89 -43.4% -262,000
Comcast $32.14 $43.15 34.3% 1,353,000
Charter $272.84 $377.89 38.5% 1,271,000
AT&T $32.19 $30.62 -4.9% -18,000
Verizon $48.49 $56.91 17.4% 2,000

As a point of comparison to the overall market, the Dow Jones Industrial average was up 4% over this same 1-year period. The above chart is not trying to make a correlation between stock prices and broadband customers since that is just one of dozens of factors that affect the performance of these companies.

Again, I’ve never fully understood how Wall Street values any given company. In reading analyst reports on CenturyLink it seems that the primary reason for the drop in stock price is that all of the company’s business units are trending downward. In the recently released 1Q 2019 results the company showed a year-over-year drop in results for the international, enterprise, small and medium business, wholesale, and consumer business units. It seems that analysts had hoped that the merger with Level 3 would reverse some of the downward trends. Stock prices also dropped when the company surprised the market by cutting its dividend payment in half in February.

CenturyLink faces the same trends as all big ISPs – traditional business lines like landline telephone and cable TV are in decline. Perhaps the most important trend affecting the company is the continued migration of broadband customers from copper-based DSL to cable company broadband. CenturyLink is not replacing the DSL broadband customers it’s losing. In 2018 CenturyLink lost a lot of broadband customers with speeds under 20 Mbps, but had a net gain of customers using more than 20 Mbps. CenturyLink undertook a big fiber-to-the-home expansion in 2017 and built fiber to pass 900,000 homes and businesses – but currently almost all expansion of last-mile networks is on hold.

It’s interesting to compare CenturyLink as an ISP with the big cable companies. The obvious big difference is the trend in broadband customers and revenues. Where CenturyLink lost 262,000 broadband customers in 2018, the two biggest cable companies each added more than a million new broadband customers for the year. CenturyLink and other telcos are losing the battle of DSL versus cable modems with customers migrating to cable companies as they seek faster speeds.

It’s also interesting to compare CenturyLink to the other big telcos. From the perspective of being an ISP, AT&T and Verizon are hanging on to total broadband customers. Both companies are also losing the DSL battle with the cable companies, but each is adding fiber customers to compensate for those losses. Both big telcos are building a lot of new fiber, mostly to provide direct connectivity to their own cell sites, but secondarily to then take advantage of other fiber opportunities around each fiber node.

Verizon has converted over a hundred telephone exchanges in the northeast to fiber-only and is getting out of the copper business in urban areas. Verizon has been quietly filling in its FiOS fiber network to cover the copper it’s abandoning. While nobody knows yet if it’s real, Verizon also has been declaring big plans to to expand into new broadband markets markets using 5G wireless loops.

AT&T was late to the fiber game but has been quietly yet steadily adding residential and business fiber customers over the last few years. They have adopted a strategy of chasing pockets of customers anywhere they own fiber.

CenturyLink had started down the path to replace DSL customers when they built a lot of fiber-to-the-home in 2017. Continuing with fiber construction would have positioned the company to take back a lot of the broadband market in the many large cities it serves. It’s clear that the new CenturyLink CEO doesn’t like the slow returns from investing in last-mile infrastructure and it appears that any hopes to grow the telco part of the business are off the table.

Everything I read says that CenturyLink is facing a corporate crisis. Diving stock prices always put strain on a company. CenturyLink faces more pressure since the activist investors group Southeastern Asset Management holds more than a 6% stake in CenturyLink and made an SEC filing that that the company’s fiber assets are undervalued.

The company has underperformed compared to its peers ever since it was spun off from AT&T as US West. The company then had what turned out to be a disastrous merger with Qwest. There was hope a few years back that the merger with CenturyLink would help to right the company. Most recently has been the merger with Level 3, and at least for now that’s not made a big difference. It’s been reported that CenturyLink has hired advisors to consider if they should sell or spin off the telco business unit. That analysis has just begun, but it won’t be surprising to hear about a major restructuring of the company.

The Fastest and Slowest Internet in the US

The web site HighSpeedInternet.com has calculated and ranked the average Internet speeds by state. The site offers a speed test and then connects visitors to the web pages for the various ISPs in each zip code in the country. I have to imagine the site makes a commission for broadband customers that subscribe through their links.

Not surprisingly, the east coast states with Verizon FiOS ranked at the top of the list for Internet speeds since many customers in those states have the choice between a fiber network and a big cable company network.

For example, Maryland was top on the list with an average speed of 65 Mbps, as measured by the site’s speed tests. This was followed by New Jersey at 59.6 Mbps, Delaware at 59.1 Mbps, Rhode Island at 56.8 Mbps and Virginia at 56 Mbps.

Even though they are at the top of the list, Maryland is like most states and there are still rural areas of the state with slow or non-existent broadband. The average speed test results are the aggregation of all of the various kinds of broadband customers in the state:

  • Customers with fast Verizon FiOS products
  • Customers with fast broadband from Comcast, the largest ISP in the state
  • Customers that have elected slower, but less expensive DSL options
  • Rural customers with inferior broadband connections

Considering all of the types of customers in the state, an average speed test result of 65 Mbps is impressive. This means that a lot of households in the state have speeds of 65 Mbps or faster. That’s not a surprise considering that both Verizon FiOS and Comcast have base product speeds considerably faster than 65 Mbps. If I was a Maryland politician, I’d be more interested in the distribution curve making up this average. I’d want to know how many speed tests were done by households getting only a few Mbps speeds. I’d want to know how many gigabit homes were in the mix – gigabit is so much faster than the other broadband products that it pulls up the average speed.

I’d also be interested in speeds by zip code. I took a look at the FCC broadband data reported on the 477 forms just for the city of Baltimore and I see widely disparate neighborhoods in terms of broadband adoption. There are numerous neighborhoods just north of downtown Baltimore with broadband adoption rates as low as 30%, and numerous neighborhoods under 40%. Just south of downtown and in the northernmost extremes of the city, the broadband adoption rates are between 80% and 90%. I have to guess that the average broadband speeds are also quite different in these various neighborhoods.

I’ve always wondered about the accuracy of compiling the results of mass speed tests. Who takes these tests? Are people with broadband issues more likely to take the tests? I have a friend who has gigabit broadband and he tests his speed all of the time just to see that he’s still getting what’s he’s paying for (just FYI, he’s never measured a true gigabit, just readings in the high 900s Mbps). I take a speed test every time I read something about speeds. I took the speed test at this site from my office and got a download speed of 43 Mbps. My office happens to be in the most distant corner of the house from the incoming cable modem, and at the connection to the Charter modem we get 135 Mbps. My slower results on this test are due to WiFi and yet this website will log me as an underperforming Charter connection.

There were five states at the bottom of the ranking. Last was Alaska at 17 Mbps, Mississippi at 24.8 Mbps, Idaho at 25.3 Mbps, Montana at 25.7 Mbps and Maine at 26 Mbps. That’s five states where the average internet speed is at or below the FCC’s definition of broadband.

The speeds in Alaska are understandable due to the remoteness of many of the communities. There are still numerous towns and villages that receive Internet backhaul through satellite links. I recently read that the first fiber connection between the US mainland and Alaska is just now being built. That might help speeds some, but there is a long way to go to string fiber backhaul to the remote parts of the state.

Mostly what the bottom of the scale shows is that states that are both rural and somewhat poor end up at the bottom of the list. Interestingly, the states with the lowest household densities such as Wyoming and South Dakota are not in the bottom five due to the widespread presence of rural fiber built by small telcos.

What most matters about this kind of headline is that even in the states with fast broadband there are still plenty of customers with lousy broadband. I would hope that Maryland politicians don’t look at this headline and think that their job is done – by square miles of geography the majority of the state still lacks good broadband.

Broadband Statistics 4Q 2018

The Leichtman Research Group has published the statistics of broadband subscribers for the largest ISPs for the year ending December 31, 2018. Following compares the end of 2018 to the end of 2017.

 4Q 2018 4Q 2017 Change
Comcast 27,222,000 25,869,000 1,353,000 5.2%
Charter 25,259,000 23,988,000 1,271,000 5.3%
AT&T 15,701,000 15,719,000 (18,000) -0.1%
Verizon 6,961,000 6,959,000  2,000 0.0%
CenturyLink 5,400,000 5,662,000 (262,000) -4.6%
Cox 5,060,000 4,960,000 100,000 2.0%
Altice 4,118,100 4,046,000 71,900 1.8%
Frontier 3,735,000 3,938,000 (203,000) -5.2%
Mediacom 1,260,000 1,209,000 55,000 4.5%
Windstream 1,015,000 1,006,600 8,400 0.8%
Consolidated 778,970 780,794 (1,824) -0.2%
WOW! 759,600 732,700 26,900 3.7%
Cable ONE 663,074 643,153 19,921 3.1%
Cincinnati Bell 311,000 308,700 2,300 0.7%
98,247,744 95,822,147 2,425,597 2.5%

The large ISPs in the table control over 95% of the broadband market in the country. Not included in these numbers are the broadband customers served by the smaller ISPs – the telcos, WISPs, fiber overbuilders and municipalities.

The biggest cable companies continue to dominate the broadband market and now have 64.3 million customers compared to 33.9 million customers for the big telcos. During 2018 the big cable companies collectively added 2.9 million customers while the big telcos collectively lost 472,000 customers.

What is perhaps most astounding is that Comcast and Charter added 2.6 million customers for the year while the total broadband market for the biggest ISPs grew by only 2.5 million. For years it’s been obvious that the big cable companies are approaching monopoly status in metropolitan areas and these statistics demonstrate how Comcast and Charter, in particular, have a stranglehold over competition in their markets.

CenturyLink and Frontier are continuing to bleed DSL customers. Together the two companies lost 465,000 broadband customers in 2018, up from a loss for the two of 343,000 in 2017.

It’s always hard to understand all of the market forces behind these changes. For example, all of the big cable companies are seeing at least some competition from fiber overbuilders in some of their markets. It would be interesting to know how many customers each is losing to fiber competition.

I’d also love to know more about how the big companies are faring in different markets. I suspect that the trends for urban areas are significantly different than in smaller markets. I know that deep data analysis of the FCC’s 477 data might tell that story. (hint, hint in case anybody out there wants to do that analysis!)

I’m also curious if the cable companies are seeing enough bottom-line improvement to justify the expensive upgrades to DOCSIS 3.1. Aside from Comcast and Charter I wonder how companies like Cox, Mediacom and Cable ONE justify the upgrade costs. While those companies are seeing modest growth in broadband customers, each is also losing cable customers, and I’d love to understand if the upgrades are cost-justified.

If there is any one takeaway from these statistics it’s that we still haven’t reached the top of the broadband market. I see articles from time to time that predict that younger households are going to bail on landline broadband in favor of cellular broadband. But seeing that over 2.4 million households added broadband in the last year seems to be telling a different story.

Cord Cutting is For Real

It’s obvious in looking at the performance of cable companies in 2018 that cord cutting is now for real. The fourth quarter count of cable customers for the largest providers was recently reported by the Leichtman Research Group. These companies represent roughly 95% of the national cable market.

4Q 2018 4Q 2017 Change
Comcast 21,986,000 22,357,000 (371,000) -1.7%
DirecTV 19,222,000 20,458,000 (1,236,000) -6.0%
Charter 16,606,000 16,850,000 (244,000) -1.4%
Dish 9,905,000 11,030,000 (1,125,000) -10.2%
Verizon 4,451,000 4,619,000 (168,000) -3.6%
Cox 4,015,000 4,130,000 (115,000) -2.8%
AT&T 3,704,000 3,657,000 47,000  1.3%
Altice 3,307,500 3,405,500 (98,000) -2.9%
Frontier 838,000    961,000 (123,000) -12.8%
Mediacom 776,000    821,000 (45,000) -5.5%
Cable ONE 326,423    363,888 (37,465) -10.3%
  Total 85,136,923 88,652,388 (3,515,465) -4.0%

I’m thinking back to 2017 when most analysts were predicting perhaps a 2% drop in 2018 in total market share due to cord cutting. Since 2018 is only the second year with real evidence of cord cutting, the 4% loss of total market share demonstrates big changes in customer sentiment.

The big losers are the satellite companies which lost 2,361,000 customers in 2018. These losses are offset a little bit since the satellite companies also have the largest online video services. Dish’s Sling TV added 205,000 customers in 2018 and AT&T’s DirecTV Now added 436,000 – but the net customer loss for these companies is still 1.7 million for the year.

In 2018 Comcast and Charter didn’t fare as poorly as the rest of the industry. However, their smaller loss of cable customers is probably due to the fact that both companies saw more than 5% growth of new broadband customers (2.6 million in total) in 2018, and those new customers undoubtedly are shielding cord cutting losses by older subscribers.

It’s still too early to make any real predictions about the future trajectory for cord cutting. We know that price is a large factor in cord cutting and cable providers are still facing huge price increases in buying programming. That will continue to drive cable prices higher. The big cable companies have done their best to disguise recent price increases by shoving rate increases into local programming or sports programming ‘fees’. However, the public is catching onto that scheme and also can still see that their overall monthly payments are increasing.

It’s starting to look like online programming might cost as much as traditional cable TV. For the last few years there have been alternatives like DirecTV Now, Playstation Vue and Sling TV that have offered the most-watched networks for bargain prices. But the recent big rate increase from DirecTV Now is probably signaling that the days of subsidized online programming are over.

Further, the online programming world continues to splinter as each owner of programming rolls out their own online products. The cost of replacing what people most want to watch online might soon be higher even than traditional cable TV if it requires separate subscriptions to Disney, CBS, NBC and the many other new standalone packages that a cord cutter must cobble together. A family that really wants to save money on TV has to settle for some subset of the online alternatives, and the big question will be if households are willing to do that.

But at least for now it looks like cord cutting is roaring ahead. The average loss of traditional cable customers in 2018 is almost 300,000 per month, and the rate of loss is accelerating. At least for now, the industry is seeing a rout, and that has to be scaring boards rooms everywhere.