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.

Can Cable Fight 5G?

The big cable companies are clearly worried about 5G. They look at the recently introduced Verizon 5G product and they understand that they are going to see something similar over time in all of their metropolitan markets. Verizon is selling 5G broadband – currently at 300 Mbps second, but promised to get faster in the future – for $70 standalone or for $50 for those with Verizon cellular.

This is the nightmare scenario for them because they have finally grown to the point where they are approaching a near monopoly in most markets. They have successfully competed with DSL and quarter after quarter have been taking DSL customers from the telcos. In possibly the last death knell for DSL, both Comcast and Charter recently increased speeds of their base products to at least 200 Mbps. Those speeds makes it hard for anybody to justify buying DSL at 50 Mbps or slower.

The big cable companies have started to raise broadband rates to take advantage of their near-monopoly situation. Charter just recently raised bundled broadband prices by $5 per month – the biggest broadband price increase I can remember in a decade or more. Last year a major Wall Street analyst advised Comcast that their basic broadband price ought to be $90.

But now comes fixed 5G. It’s possible that Verizon has found a better bundle than the cable companies because of the number of households that already have cellphones. It’s got to be tempting to homes to buy fast broadband for only $50 per month in a bundle.

This fixed 5G competition won’t come over night. Verizon is launching 5G in urban markets where they already have fiber. Nobody knows how fast they will really implement the product, due mostly to distrust of a string of other Verizon hype about 5G. But over time the fixed 5G will hit markets. Assuming Verizon is successful, then others will follow them into the market. I’m already seeing some places where companies American Tower are building 5G ‘hotels’ at poles, which are vaults large enough to accommodate several 5G providers at the same location.

We got a clue recently about how the cable companies might fight back against 5G. A number of big cable companies like Comcast, Charter, Cox and Midco announced that they will be implementing the new 10 Gbps technology upgrade from CableLabs. These cable companies just recently introduced gigabit service using DOCSIS 3.1. It looks like the cable companies will fight against 5G with speed. It sounds like they will advertise speeds far faster than the 5G speeds and try to win the speed war.

But there is a problem with that strategy. Cable systems with the DOCSIS 3.1 upgrade can clearly offer gigabit speeds, but in reality cable company networks aren’t ready or able to deliver that much speed to everybody. Fiber networks can easily deliver a gigabit to every customer, and with an electronics upgrade can offer 10 Gbps to everybody, as is happening in parts of South Korea. But cable networks have an inherent weakness that makes gigabit speed problematical.

Cable networks are still shared networks and all of the customers in a node share the bandwidth. Most cable nodes are still large with 150 – 300 customers in each neighborhood node, and some with many more. If even a few customers start really use gigabit speeds then the speed for everybody else in the node will deteriorate. That’s the issue that caused cable networks to bog done in the evenings a decade ago. Cable companies fixed the problem then by ‘splitting’ the nodes, meaning that they build more fiber to reduce the number of homes in each node. If the cable companies want to really start pushing gigabit broadband, and even faster speeds, then they are faced with that same dilemma again and they will need another round, or even two rounds of node splits.

For now I have serious doubts about whether Comcast and Charter are even serious about their gigabit products. Comcast gigabit today costs $140 plus $10 for the modem. The prices are lower in markets where the company is competing against fiber, and customers can also negotiate contract deals to get the gigabit price closer to $100. Charter has similar pricing – in Oahu where there is competition they offer a gigabit for $105, and their price elsewhere seem to be around $125.

Both of these companies are setting gigabit prices far above Google’s Fiber’s $70 gigabit. The current cable company gigabit is not a serious competitor to Verizon’s $50 – $70 price for 300 Mbps. I have a hard time thinking the cable companies can compete on speed alone – it’s got to be a combination of speed and price. The cable companies can compete well against 5G if they are willing to price a gigabit at the $70 Verizon 5G price and then use their current $100+ price for 10 Gbps. That pricing strategy will cost them a lot of money in node upgrades, but they would be smart to consider it. The biggest cable companies have already admitted that their ultimate network needs to be fiber – but they’ve been hoping to milk the existing coaxial networks for another decade or two. Any work they do today to reduce node size would be one more step towards an eventual all-fiber network – and could help to stave off 5G.

It’s going to be an interesting battle to watch, because if we’ve learned anything in this industry it’s that it’s hard to win customers back after you lose them. The cable companies currently have most of the urban broadband customers and they need to act now to fight 5G – not wait until they have lost 30% of the market.

Verizon’s Residential 5G Broadband

We finally got a look at the detail of Verizon’s 5G residential wireless product. They’ve announced that it will be available to some customers in Houston, Indianapolis, Los Angeles and Sacramento starting on October 1.

Verizon promises average download data speeds of around 300 Mbps. Verizon has been touting a gigabit wireless product for the last year, but the realities of wireless in the wild seems to have made that unrealistic. However, 300 Mbps is a competitive broadband product and in many markets Verizon will become the fastest alternative competitor to the cable companies. As we’ve seen everywhere across the country, a decent competitor to the big cable companies is almost assured of a 20% or higher market penetration just for showing up.

The product will be $50 per month for customers who use Verizon wireless and $70 for those that don’t. These prices will supposedly include all taxes, fees and equipment – although it’s possible that there are add-ons like using a Verizon WiFi router. That pricing is going to be attractive to anybody that already has Verizon cellular – and I’m sure the company is hoping to use this to attract more cellular customers. This is the kind of bundle that can make cellular stickier and is exactly what the Comcast and Charter have in mind as they are also offering cellular. Verizon is offering marketing inducements for the roll-out and are offering 3 months free of YouTube TV or else a free Apple TV 4K or a Google Chromecast Ultra.

Theoretically this should set off a bit of a price war in cities where Comcast and Charter are the incumbent cable providers. It wouldn’t be hard for those companies to meet or beat the Verizon offer since they are already selling cellular at a discount. We’re going to get a fresh look at oligopoly competition – will the cable companies really battle it out? The cable companies have to be worried about losing significant market share in major urban markets.

We’re also going to have to wait a while to see the extent of the Verizon coverage areas. I’ve been speculating about this for a while and I suspect that Verizon is going to continue with their history of being conservative and disciplined. They will deploy 5G where there is fiber that can affordably support it – but they are unlikely to undertake any expensive fiber builds just for this product. Their recently announced ‘One Fiber’ policy says just that – the company wants to capitalize on the huge amount of network that they have already constructed for other purposes. This means it’s likely in any given market that coverage will depend upon a customer’s closeness to Verizon fiber.

There is one twist to this deployment that means Verizon might not be in a hurry to deploy this too quickly. The company has been working with Ericsson, Qualcomm, Intel and Samsung to create proprietary equipment based upon the 5GTF standard. But the rest of the industry has adopted the 3GPP standard for 5G and Verizon admits it will have to replace any equipment installed with their current standard.

Verizon also said over the last year that they wanted this to be self-installed by customers. At least for now the installations are going to require a truck roll, which will add to the cost and the rate of deployment of the new technology.

Interestingly, these first markets are outside of Verizon’s telco footprint. This means that Verizon will not only be taking on cable companies, but that they might be putting the final nail in the coffin of DSL offered by AT&T and other telcos in the new markets. Verizon is unlikely to roll this out to compete with their own FiOS product unless deployments are incredibly inexpensive. But this might finally bring a Verizon broadband product to neighborhoods in the northeast that never got FiOS.

It’s going to be a while under we understand the costs of this deployment. Verizon has been mum about the specific network elements and reliance on fiber needed to support the product. And they have been even quieter about the all-in cost of deployment.

Cities all over the country are going to get excited about this deployment in the hope of getting a second competitor to their cable company which are often a near-monopoly. It appears that the product is going to work best where there is already a fiber-rich environment. Most urban areas, while having little last mile-fiber, are crisscrossed with fiber used to get to large businesses, governments, schools, etc.

The same is not necessarily the same in suburbs and definitely not true of smaller communities and rural America. The technology depends upon local last-mile fiber backhaul. Verizon says that they believe their potential market will be to eventually pass 30 million households, or a little less than 25% of the US market. I’d have to think that the map for others, except perhaps for AT&T largely coincide with the Verizon map. It seems that Verizon wants to be the first to market to potentially dissuade other entrants. We’ll have to wait and see if a market can reasonably support more than one last-mile 5G provider – because companies like T-Mobile also have plans for wide deployment.

Upgrading Broadband Speeds

A few weeks ago Charter increased my home broadband speeds from 60 Mbps to 130 Mbps with no change in price. My upload speed seems to be unchanged at 10 Mbps. Comcast is in the process of speed upgrades and is increasing base speeds to between 100 Mbps and 200 Mbps download speeds in various markets.

I find it interesting that while the FCC is having discussions about keeping the definition of broadband at 25 Mbps that the big cable companies – these two alone have over 55 million broadband customers – are unilaterally increasing broadband speeds.

These companies aren’t doing this out of the goodness of their hearts, but for business reasons. First, I imagine that this is a push to sharpen the contrast with DSL. There are a number of urban markets where customers can buy 50 Mbps DSL from AT&T and others and this upgrade opens up a clear speed difference between cable broadband and DSL.

However, I think the main reason they are increasing speeds is to keep customers happy. This change was done quietly, so I suspect that most people had no idea that the change was coming. I also suspect that most people don’t regularly do speed tests and won’t know about the speed increase – but many of them will notice better performance.

One of the biggest home broadband issues is inadequate WiFi, with out-of-date routers or poor router placement degrading broadband performance. Pushing faster speeds into the house can overcome some of these WiFi issues.

This should be a wake-up call to everybody else in the industry to raise their speeds. There are ISPs and overbuilders all across the country competing against the giant cable companies and they need to immediately upgrade speeds or lose the public relations battle in the market place. Even those who are not competing against these companies need to take heed, because any web search is going to show consumers that 100 Mbps broadband or greater is now the new standard.

These unilateral changes make a mockery of the FCC. It’s ridiculous to be having discussions about setting the definition of broadband at 25 Mbps when the two biggest ISPs in the country have base product speeds 5 to 8 times faster than that. States with broadband grant programs also have the speed conversation and this will hopefully alert them that the new goal for broadband needs to be at least 100 Mbps.

These speed increases were inevitable. We’ve known for decades that the home demand for broadband has been doubling every three years. When the FCC first started talking about 25 Mbps as the definition of acceptable broadband, the math said that within six years we’d be having the same discussion about 100 Mbps broadband – and here we are having that discussion.

The FCC doesn’t want to recognize the speed realities in the world because they are required by law to try to bring rural speeds to be par with urban speeds. But this can’t be ignored because these speed increases are not just for bragging rights. We know that consumers find ways to fill faster data pipes. Just two years ago I saw articles wondering if there was going to be any market for 4K video. Today, that’s the first thing offered to me on both Amazon Prime and Netflix. They shoot all new programming in 4K and offer it at the top of their menus. It’s been reported that at the next CES electronics shows there will be several companies pushing commercially available 8K televisions. This technology is going to require a broadband connection between 60 Mbps and 100 Mbps depending upon the level of screen action. People are going to buy these sets and then demand programming to use them – and somebody will create the programming.

8K video is not the end game. Numerous companies are working on virtual presence where we will finally be able to converse with a hologram of somebody as if they were in the same room. Early versions of this technology, which ought to be available soon will probably use the same range of bandwidth as 8K video, but I’ve been reading about near-future technologies that will produce realistic holograms and that might require as much as a 700 Mbps connection – perhaps the first real need for gigabit broadband.

While improving urban data speeds is great, every increase in urban broadband speeds highlights the poor condition of rural broadband. While urban homes are getting 130 – 200 Mbps for decent prices there are still millions of homes with either no broadband or with broadband at speeds of 10 Mbps or less. The gap between urban and rural broadband is growing wider every year.

If you’ve been reading this blog you know I don’t say a lot of good things about the big cable companies. But kudos to Comcast and Charter for unilaterally increasing broadband speeds. Their actions speak louder than anything that we can expect out of the FCC.