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.

The Growing Dislike of Big ISPs

The annual ratings from the American Consumer Satisfaction Index came out recently, and they show that consumer dislike for the big ISPs is increasing. This survey looks at how consumers feel about a wide range of businesses, and the ISPs have been ranked as some of the most disliked corporations for a number of years.

The survey asks numerous questions and creates a satisfaction scale from 1 to 100. The survey looks at several different categories of telecom companies and has separate rankings for for cable TV providers, broadband providers and a new category for streaming video providers.

Among the big ISPs that offer cable TV service, the rank of every provider except AT&T U-Verse sank compared to last year. AT&T was the highest rated company in this group with a rating of 70. At the bottom was Mediacom with a rating of 55, down from 56 a year ago. The two giant cable companies both saw a drop in consumer satisfaction: Charter had a huge drop from 63 down to 58, Comcast dropped from 58 to 57.

The rankings for how consumers feel about their broadband provider were similar. The only big ISP that didn’t drop was Comcast that stayed at a ranking of 60 for two years running. Everybody other big ISP dropped. At the top of the list was Verizon FiOS which dropped from 71 to 70. At the bottom was Mediacom again which had a big drop from 58 to 53. Charter also had a big drop from 63 to 58. Rounding out the bottom rankings were Frontier (54), Windstream (56) and CenturyLink (58)

Streaming services got significantly higher rankings. Topping this first time list were Netflix, Playstation Vue and Twitch with a ranking of 78. At the bottom were Sony Crackle (68), Showtime Anywhere (70) and DirecTV Now (70), all still significantly better than traditional cable companies.

It must be frustrating for the big ISPs to see their customer satisfaction drop year after year. The rankings of the ISPs are lower than other unpopular industries like airlines, banks, insurance companies and even the Internal Revenue Service.

If there is any upside to the low customer satisfaction rankings it’s that it creates opportunities for competitors. It’s been conventional wisdom for years that a new competitor will get up to 30% of a market just for showing up with an alternative network – assuming they know how to sell and have decent customer service.

They survey doesn’t dig into the reasons for the sinking dissatisfaction, but it’s easy to speculate on some of the reasons. People are certainly unhappy with traditional cable TV due to the ever-rising prices. High prices are the number one factor cited for consumers who are cutting the cord, and the dropping satisfaction shows there is likely another growing pile of future cord cutters.

It’s a little harder to understand the dissatisfaction with broadband. At least in major metropolitan areas the ISPs have continued to unilaterally increase download speeds with only modest rate hikes. One would expect satisfaction with the the broadband product to be higher and my guess is that the low ranking deal more with the pain involved in having to ever call these big companies. Compared to other businesses we all deal with, the interaction with the cable company / ISP is often the one we dread the most. The other likely cause for dissatisfaction is that ISPs often don’t deliver the speeds they promise. This varies by market, but we’ve seen cities where consumers only get a fraction of the speed they are paying for.

It’s much easier to understand unhappiness with ISPs immediately outside of big cities. Broadband is smaller towns is often still generations behind and is inadequate for what households expect today in terms of download speeds and latency. Anybody who reads this blog will understand the near-hatred for the ISPs in rural areas. The cable companies don’t come to rural America and the big telcos have abandoned maintenance of the copper networks for decades. Rural broadband is either poor or nonexistent with practically everybody hating the companies that won’t bring them broadband.

 

Can Small Cable Companies Survive?

Today I ask if a small provider can be profitable and succeed with a cable TV product. This was prompted by the news that Cable One, one of the traditional mid-sized cable companies, is bleeding cable customers. For those not familiar with the company they are headquartered in Phoenix, AZ and operate cable systems in 19 states with the biggest pockets of customers in Idaho, Mississippi and Texas.

The company just reported that for the 12 months ending on March 31 that they had lost 12.7% of their cable customers and dropped below 300,000 total cable customers. Just a few years ago the company would not have cracked the top ten cable companies in the country in size, but with all of the consolidation in the industry they are now at the bottom of that list.

While most of my clients would consider anybody on the list of top ten cable companies to be large, I wonder if anybody smaller than the few really giant cable companies can maintain a profitable and viable cable product in today’s environment?

Cable One’s drop in cable customers was precipitated by several factors. One that is very familiar to small cable operators is that Cable One decided in 2015 to drop the Viacom suite of channels from their system. Small cable operators all remember when Viacom announced huge and unprecedented rate increases of over 60% for the suite of channels that include MTV, Comedy Central, BET and a number of other channels. A number of my clients also decided to drop Viacom rather than pay for the huge increases in programming.

Cable One also shares another characteristic with smaller companies in that they are too small to unilaterally negotiate alternate piles of programming to sell as skinny bundles. So they and other small companies are likely to see customers abandoning them for smaller line-ups from Sling TV and other purveyors of smaller on-line line-ups.

Finally, Cable One is seeing the same cord cutting as everybody else. While only a fraction of their customer losses can be blamed on cord cutting, it is now a real phenomenon and all cable companies can expect to routinely lose a larger number of customer every year to Netflix and others.

The giant cable companies are not immune from these same market influences. The giants like Comcast and Charter are also seeing big increases in programming costs. Recent Comcast financials show that the company saw a 13% increase in programming cost over the prior year (although some of that increase was paid to their own programming subsidiaries).

It looks like the giant cable companies will be able to offset losses in cable margins with new sources of revenues. Comcast has launched a cellular product and Charter recently announced becoming a partner in that business. I’ve written several blogs of all of the ways that Comcast is still growing their business – almost all which smaller companies are unable to duplicate.

A big dilemma for small cable companies is that the TV product still drives positive margins. While every small cable provider I know moans that they lose money on the cable product, the revenues generated from cable TV still exceed the cost of programming and almost every company I know would suffer at the bottom line if they killed the TV product line.

It has to be troubling for programmers to see cable companies struggling this hard. If somebody the size of Cable One is in crisis then the market for the programmers is quickly shrinking to only serving the handful of giant cable companies. The consolidation of cable providers might give enough market power to the huge cable companies to fight back against big rate increases. For instance, Charter recently announced that they were demoting a number of Viacom channels to higher tiers, meaning that the channels would not automatically be included in the packages that all customers get and that payments to Viacom will decrease.

It’s hard to think of another industry that is trying so hard collectively to drive away their customer base. But all of the big companies in the sector – the cable providers and programmers – are publicly traded companies that face huge pressure to keep increasing earnings. As customers disappear the programmers raise rates higher to make up for the losses, which then drives more customers out of the cable market. It doesn’t take sophisticated trending to foresee a day coming in the next decade where cable products will become too expensive for most homes. We are watching a slow train wreck which the industry seems to have no will or ability to stop.

It also doesn’t take a crystal ball to foresee when cable will turn into a true loser for small cable operators. I already know of a dozen telcos that have backed out of the cable business and over the next decade this is likely to turn into a flood as companies back away from a dying product line.

Finally a la carte TV?

Charter just sent me an advertisement that got my attention. They are offering a TV package for $21.99 per month that includes my local network affiliates plus ten other channels that I get to select. This is the first TV service I’ve seen that provides a la carte choice. The statistics from Nielsen show that the average family watches around a dozen channels and this service could give people exactly that.

The local networks included are ABC, CBS. FOX, NBC and PBS. The offer I got then allows me to pick 10 out of 65 of the most popular cable networks. This includes a wide range of options like AMC, Bravo, CNN, the Disney Channel, the Food Network, HGTV, MTV, MSNBC, TBS, and USA. I was surprised to see the offer includes the option to pick the pricier sports networks like ESPN, ESPN2 and FS1. This price includes access to the apps of your selected channels. Charter also offers around 6,000 on-demand titles, although it’s hard to know how worthwhile this might be without signing up for the package.

The offer made it sound like this was an online OTT offering, but when I went to the web site I found that I can choose between delivery through a Charter settop box or delivery through a Charter broadband connection.

My first reaction to the offer is ask how Charter is able to offer this. There are specific FCC rules that define cable tiers and I’m not sure how Charter gets away with this as a traditional cable product. This doesn’t fit the FCC definition of a basic tier and certainly is not even close to an expanded basic tier. We’ve been told for years that cable companies cannot offer a la carte pricing for channels, and yet Charter is doing just that. I’m guessing that Charter does not consider this to be a true OTT offering since it’s only available to Charter broadband customers and never touches the open web.

I also wonder about the $21.99 price. I have a hard time thinking that Charter talked the local network affiliates across their huge footprint to agree to put their content onto the web, and so Charter is going to charge local franchise fees on the product with or without having the settop box. I also wonder if Charter will charge ancillary fees like a local broadcast fee or other bogus fees they charge to their normal cable customers. Anybody getting this through a settop box is clearly going to pay for the box. A customer buying this through a settop box might end up paying $35 to $40.

I also wonder if I can watch this programming when I’m traveling, which is a major consideration for me. If they can make that work then I again wonder how Charter can ship local affiliate programming over the web.

Regardless of how they are getting past all of the regulatory rules this has the potential to be a great product. Assuming it doesn’t really cost too much more than $21.99 it blows away the base prices for other OTT options like Sling TV, Playstation Vue and DirecTV Now. Those packages have an affordable basic option, but it always costs more when you add enough tiers to get the dozen channels you really want. As a traditional cable service it’s massively better than Charter’s basic offering for around the same price that doesn’t include any popular network. Any Charter basic customer ought to upgrade to this package. Interestingly Charter is charging a $20 install fee whether this is done using a cable box or over broadband, which further confirms that this is probably not considered as an OTT product.

Surveys have always shown a huge public desire for a la carte programming. People don’t like paying for the hundred channels they don’t watch. I have to think that this is going to put the pressure on the other cable companies to offer something similar.

This product seems to be aimed at cannibalizing Charter’s other TV offerings. This offer, perhaps more than anything else I’ve seen from a cable company shows that they recognize that a huge number of their customers are thinking of bailing on traditional cable TV. This offer offers a lower price option for customers to not completely cut the cord. Unless they pad this with ancillary fees it’s hard to see much margin in this package.

This package makes a lot of sense in places like the research triangle of North Carolina where Charter is competing against Google Fiber and AT&T fiber. It’s harder to understand why they are offering a low-margin cable option where they are competing only against DSL. Perhaps the reasoning is as simple as wanting to keep a few dollars margin rather than losing customers as cord cutters.

I thought about buying this, but I don’t really trust Charter and wonder what the real price tag is – it’s almost certainly not $21.99. I would also be unhappy if this only worked when I was at home on my Charter broadband connection. I am an unabashed Maryland Terrapins fan and I also wouldn’t buy this package since it doesn’t include the Big10 Network. Perhaps my own pickiness about channels shows the real challenge of offering a la carte programming. We each have our list of favorite channels and are likely to reject any OTT offer that excludes a network we insist on buying.

 

The Impact of the End of Net Neutrality

Charter has given us a peek at how the big ISPs are likely to take advantage of the end of net neutrality. Charter is in the middle of a lawsuit filed by New York Attorney General Eric Schneiderman. The suit attacks Charter for promising to deliver Internet speeds as part of the purchase of Time Warner that the company knew it couldn’t deliver. There are other allegations in the suit and I covered it in this earlier blog.

While the FCC won’t formally vote to end Title II regulation for another week it’s largely a foregone conclusion that they will do so. Charter is assuming that it’s a done deal and they have filed paperwork trying to dismiss the New York lawsuit based upon the assumption that the FCC will end net neutrality.

Charter has sent a letter to the courts and is making the following claims:

Federal law preempts state and local laws. Charter is arguing that the planned FCC order will preempt state and local laws concerning broadband. This is an aspect of the proposed FCC order that has not gotten much attention. The proposed FCC order contains a long discussion that talks about the role of federal versus state regulations and comes to the conclusion that federal low should override state and local broadband laws. It’s sort of an ironic position for the FCC to take since they are actually eliminating the FCC’s role in regulating broadband – but they interpret that to mean that states and localities also have no right to regulate broadband.

Charter specifically says that New York can’t criticize the company for delivering slow Internet speeds. They argue that since the FCC will no longer regulate broadband and Internet speeds that New York also does not have the right to do so.

Paid Prioritization. Charter is also arguing that New York has no right to regulate paid prioritization. This is one of the three principles of net neutrality that currently is in effect. Charter is arguing that the FCC’s proposed ‘light-touch’ regulation means that the FCC will be eliminating the net neutrality principles and this means that these principles can no longer be used to judge Charter’s products.

The New York lawsuit had attacked Charter for not maintaining a robust enough network that could deliver the speeds customers need. Specifically, New York alleged that people were unable to watch Netflix and that Charter’s network failures amount to throttling of the Netflix data stream.

The new FCC rules aren’t even in effect yet, but this tells a lot about how the big ISPs are viewing the change in rules. Charter wants to use these rules to protect themselves against any fines for not delivering advertised broadband speeds to customers. They also are openly acknowledging that they have no obligations against violations of the current net neutrality rules – and that they have no obligations to ever try to meet them.

Charter’s arguments in the case erase any doubt about how the big ISPs intend to act once they are not regulated. While they will probably generally try to deliver a decent broadband product, they feel under no legal obligation to do so. If you go back and look at the facts in this case you will see customers in New York who have been paying for clearly inferior broadband for years – broadband that is far slower than advertised and that is even too slow to deliver Netflix. Charter promised to fix the network issues that are causing the slow broadband, but it’s clear from the New York lawsuit that no upgrades have been implemented. Lack of broadband regulations might mean that the Charter customers in New York might never get good broadband – the company doesn’t think they have any obligation to provide it.

Charter’s response to this lawsuit largely validates all of the consumer fears that have been expressed as part of the net neutrality debate. The FCC is washing their own hands of anything having to do with broadband regulation, and are also preempting states and localities for doing anything. This leaves the consumer with no place to go to remedy, or even protest bad ISP behavior.

One hopes that the big ISPs want to deliver a decent broadband product – but the facts in this case show a blatant disregard for both customers and regulators. Charter has promised to improve the condition of the Time Warner networks as part of the merger but then failed to do so. The sad fact is that many of the customers with the shoddy Charter service have no real alternative. DSL is dying and the cable companies are becoming virtual monopolies in most of the markets in the country. If Charter prevails with these arguments it will show that there is no regulatory body with the ability to police the ISPs.

FCC Wants to Change 3.5 GHz Spectrum Rules

The FCC voted last week to re-examine the rules for the deployment of 3.5 GHz spectrum for wireless broadband. This is the spectrum that has generally been referred to as Citizen’s Band Radio. This change clearly favors large carriers over the small carriers which were the targeted users from the existing rules.

The specific changes proposed by the rules include:

  • Lengthened the length of a license from 1 year to 10 years.
  • Eliminate the rules that the exclusivity of a license expires at the end of the first license term. Exclusivity can now extend into a license renewal.
  • Increase the size of the geographic footprint of a license. The license area before was a census tract, which is generally an area encompassing 2,500 to 8,000 people. The Census views a tract as the equivalent of a ‘neighborhood’. The new licenses areas are proposed to be something larger like entire counties or else Partial Economic Areas (PEAs). PEAs were defined in the recent incentive auctions and subdivide the country into 416 PEA regions.
  • Allows license holders to partition and disaggregate licenses between adjacent geographic areas.
  • Eliminated the rules that limited the number of licenses that can be held by one entity in an area. This also would allow license holders to bid on the use of individual channels.

What does all of this mean? This is largely a shift to allow big wireless carriers to obtain and use the spectrum for cellular service. Before the spectrum rules were aimed at benefiting small rural broadband providers. They would have been able to get a license for a small geographic area and they then got a 1-year head-start to deploy the spectrum before anybody else. The first licensee then had an advantage because future deployments had to be synchronized to not interfere with them.

The old rules made it difficult, but not impossible, for the bigger companies to use the spectrum. A cellular provider was not likely to invest in small license footprints and only be protected for a year from competition and interference. But the new rules allow for a much bigger footprint, similar to that used for other cellular spectrum. And the ten-year license provides a long-term opportunity for no competition, as well as a chance to renew the original license.

Basically this is a spectrum grab by the cellular providers to use for LTE or 5G cellular. Two of the big proponents of these changes include Comcast and Charter which want their own spectrum to support their new cellular businesses.

This change will make it much harder for rural deployments by WISPs and other ISPs willing to serve customers with wireless connections. The original rules also envisioned that this spectrum would enable smaller carriers to deploy various small-cell technologies and not just point-to-multipoint radios.

This is another proposed ruling that shows that current FCC is now clearly pro-big business. Almost every ruling they’ve made so far benefits big companies – the big ISPs, the big TV station owners, and the big wireless carriers. This particular ruling is a big give-away to the cellular companies and to Comcast and Charter. Under the rules the spectrum can be licensed inexpensively compared to spectrum that is auctioned. The new rules allowing large coverage areas will greatly disadvantage small carriers that only want to license a small service area – which was the entire purpose of the original rules for the spectrum.

The FCC voted 4-1 to consider the new rules, which is a likely indication that the new rules will be adopted after the required deliberation time required by FCC rules.

Title II Regulation and Investment

As the FCC continues its effort to reversing Title II regulation, I’ve seen the carriers renewing their argument that Title II regulation has reduced their willingness to invest in infrastructure. However, their numbers and other actions tell a different story.

The FCC put broadband under Title II regulation in February of 2015 and revised the net neutrality rules a few months later in April. So we’ve now had nearly three years to see the impact on the industry – and that impact is not what the carriers are saying it is.

First, we can look at annual infrastructure spending for the big ISPs. Comcast spent $7.6 billion upgrading its cable plant in 2016, its highest expenditure ever. Charter spent 15% more in 2016 compared to what was spent on it and the cable companies it purchased. Even Verizon’s spending was up in 2016 by 3% over 2015 even though the company had spun off large fiber properties in Florida, Texas, California and other states. AT&T spent virtually the same amount on capital on 2015 and 2016 as it had done in 2013 and 2014.

I’ve seen a number of articles that focus on the overall drop in investment from the cellular industry in 2015. But that drop is nearly 100% attributable to Sprint, which pulled back on new capital spending due to lack of cash. All of the big cellular companies are now crowing about how much they are going to spend in the next few years to roll-out 5G.

It’s important to remember that what the big ISPs tell their investors is often quite different than what they say when lobbying. As publicly traded companies the ISPs are required by law to provide accurate financial data including a requirement to warn stockholders about known risk factors that might impact stock prices. I’m one of those guys that actually reads financial statements and I’ve not seen a single warning about the impact of Title II regulation in the financial reporting or investor press releases of any of the big ISPs.

But the lobbying side of these businesses is a different story. The big ISPs started complaining about the risks of Title II regulations as far back as 2013 when it was first suggested. The big companies and their trade associations have written blogs warning about Title II regulation and predicted that it would stifle innovation and force them to invest less. And they’ve paid to have ‘scholarly’ articles written that come to the same conclusion. But these lobbying efforts are aimed mostly at the FCC and at legislators, not at stockholders.

The fact that big corporations can get away with having different public stories has always amazed me. One would think that something published on the AT&T or Comcast blog would be under the same rules as documents formally given to investors – but it’s obviously not. AT&T in particular tells multiple stories because the company wears so many different hats. In the last year the company has taken one position as an owner of poles that is diametrically opposed to the position it takes as a cellular company that wants to get onto somebody else’s poles. Working in policy for the big ISPs has to be a somewhat schizophrenic situation.

It seems almost certain that this FCC is going to reverse Title II regulation. The latest rumor floating around is that it will be on their agenda on the day before Thanksgiving. That may lead you to ask why the ISPs are still bothering cranking out the lobbying arguments against Title II if they have already won. I think they are still working hard to get a legislative solution through Congress to kill Title II regulation and net neutrality, even if the FCC kills it for now. I think they well understand that a future FCC under a different administration could easily reinstate Title II regulation – particularly now that it has passed muster through several court challenges. The ISPs understand that it will be a lot harder to get a future Congress to reverse course than it might be if Democrats are back in charge of the FCC.

Until recently I always wondered why the ISPs are fighting so hard against Title II regulation. All of the big companies like Comcast, AT&T and Verizon have told stockholders that their initial concerns about Title II regulation did not materialize. And it’s obvious that Title II hasn’t changed the way they invest in their own companies.

But recently I saw an article and wrote a blog about an analyst who thinks that the ISPs are going to drastically increases broadband prices once Title II regulation is gone. Title II is the only tool that the government can use to investigate and possibly act against the ISP for rate increases and for other practices like data caps. If true, and his arguments for this are good ones, then there is a huge motivation for the big ISPs to shed the only existing regulation of broadband.

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.