The Competition Dilemma

One of the most perplexing issues for fiber overbuilders is what I call the competition dilemma. That is where the big cable companies like Comcast will match the prices of any major competitor in their footprint, making it impossible for a competitor to ever get a price advantage.

A lot of fiber overbuilders enter the market and hope to gain customers by offering lower prices. You saw this when Google Fiber offered a gigabit broadband connection for $70, and I see the same thing from many smaller ISPs. But any price advantage disappears if the large incumbent cable company matches the lower prices.

This is an interesting dilemma for municipal cable systems. They often enter the market with a goal of lowering prices in their market. And when the incumbent provider matchers their prices the municipality has achieved their goal since everybody in the city then benefits from lower prices.

But this comes at a cost. Lower prices mean lower margins, and any ISP that lowers prices is hurting their own bottom line. You would think that lower prices also hurt the incumbent providers, but the big ISPs have the advantage of being able to charge more in surrounding communities to offset lower margins where there is competition. They factor in competition when setting their nationwide prices, so it can be argued that competition doesn’t really hurt big companies at all – they make up for competitive losses by charging a little more everywhere else.

There doesn’t seem to be any limit on how low an incumbent provider will go to match prices. Take the example of the cable TV product on the city-owned Click! Network in Tacoma, WA. For many years the city didn’t raise cable prices, and Comcast matched their low pricing. Over time the cable prices in Tacoma were over 30% lower than prices in the Tacoma suburbs and nearby cities like Seattle. The customers in the city benefitted from low cable rates, but the city was losing money on cable TV and over time raised their rates back to the market rates.

This issue is going to be in the news a lot more in the future. In a recent blog I talked about an analyst who believes that Comcast is going to double their broadband rates over the next few years. Even if their rate increases aren’t that drastic I think it’s obvious that they plan to raise rates. This is probably the number one reason they have been lobbying hard to get rid of Title II regulation, since that is the only tool that regulators could use to examine and react to broadband rate increases.

If Comcast and the other big ISPs undertake regular broadband price increases they will create an interesting dynamic in the industry. Anybody with a competing network is going to have to decide if they are going to raise rates to match them. It’s going to be tempting to do so because increases in broadband rates flow 100% straight to the bottom line. But if a competitor doesn’t raise rates, then it’s likely that the big ISPs will raise rates everywhere except where there is significant competition. And that would result in big difference in broadband prices between markets with and without a competitor.

It’s also likely that as the big ISPs raise broadband rates that they will be inviting competitors into the market. I create a lot of financial business plans and there are many markets where it’s hard to make a business case for building fiber at today’s broadband rate. But raise those rates and a lot more business plans become attractive.

The final issue raised by the competition dilemma is customer choice. Most cities desperately want competition in their markets because they can see the large cable companies becoming near-monopolies. One of the primary reasons why cities build fiber networks or lure ISPs to do so is to provide more choice. But you have to ask what kind of choice customers really get when there is no price difference between a competitor and the incumbents?

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.

Another Comcast Bundle

Comcast just announced that they will be bundling solar panels with their other services in selective markets. This adds to the already-largest bundle of products in the industry and is one that many competitors will have a problem keeping up with.

Comcast has been doing a trial with Sunrun, a solar panel maker from San Francisco. Comcast found during this test that their customer satisfaction and customer retention rates rose significantly with customers who bought the solar panels. Comcast has now entered into an exclusive 40-month marketing deal with the company. It’s been reported that Comcast will get 10% of Sunrun’s stock if they can install 60,000 solar customers. Comcast has committed to spend $10 million on sales and marketing for the solar panels and will get a share of the customer revenue from the product.

Sunrun currently has about 150,000 solar installations in 22 states. Comcast has over 27 million potential solar customers. The cable company also has over 1 million home automation customers, which Comcast believes will be their best market for the new solar product.

Even before this announcement Comcast has become a fierce competitor. Comcast’s CEO Brian Roberts recently said that as he looked around the industry that he didn’t see any products of interest that the company doesn’t already have – a claim no other ISP can make.

This announcement falls on the heels of Comcast’s decision to get into the cellular business. They are now marketing in a few markets with prices lower than Verizon and AT&T and plan to eventually roll this out to their whole footprint. They also just bought a pile of spectrum that will help them increase margins on cellular service. Analysts say that over five years that Comcast could capture as much as 30% of the cellphone business in their markets.

Comcast says it is tackling both of these product lines to reduce churn and to increase customer stickiness. They understand that long-time customers are their most profitable customers and they are putting together bundle options that ought to please a lot of households.

All of their effort looks to be paying off. Comcast is the only cable company that gained cable TV customers for the year just ended in the second quarter. They gained 120,000 customers while the rest of the industry is now bleeding cable customers at an average rate of 2.5% of total customers per year. While the bundles are probably not the only reason for that it’s hard to argue with this success.

Comcast has done a lot of other things to increase customer satisfaction. They created Comcast Labs (similar to Bell Lab). This group of scientists and engineers are concentrated largely on developing products that improve the customer experience. This group developed the X1 settop box which has rave reviews from customers. It’s so popular that Comcast is now selling this box to other monopoly cable providers. The settop box has an ever-growing number of features and can be voice-activated. Comcast has also integrated Netflix and Sling TV into their settop box to keep customers on their box and platform.

Comcast has also found great success with their smart home product. This is probably the most robust such product on the market and includes such things as security and burglar alarms, smart thermostat, watering systems, smart blinds for energy control, security cameras, smart lights, smart door locks, etc. Their product suite can be easily monitored from the settop box or from a smartphone app. The press releases from the Sunrun announcement is the first time in a while that we’ve heard about their success and the million plus customers using these products.

The company still has a lousy reputation for customer service and most of their customers dread having to call them. But they are supposedly putting a lot of money into making their customer service better. They recently began moving a lot of customer service back to the US, finally understanding that the cost savings of using foreign reps is not worth the customer dissatisfaction.

The flip side to making customers more sticky is that it makes it that much harder for a competitor to take their customers. Somebody buying a solar panel on a long-term payment plan is not likely to leave them for a competitor, particularly if there are financial penalties for doing so. Customers with a suite of home automation products become locked in unless they are willing to yank all of the monitors out and start over. Bit by bit Comcast is shielding their most lucrative customers from being poached by others.

Where’s the Top of the Broadband Market?

Last week I looked at the performance of the cable TV industry and today I’m taking a comparative look at broadband customers for all of the large ISPs in the country. Following are the comparative results comparing the end of 2Q 2017 to 2Q 2016.

2017 2016 Change
Comcast 25,306,000 23,987,000 1,319,000 5.5%
Charter 23,318,000 21,815,000 1,503,000 6.9%
AT&T 15,686,000 15,641,000 45,000 0.3%
Verizon 6,988,000 7,014,000 (26,000) -0.4%
CenturyLink 5,868,000 5,990,000 (122,000) -2.0%
Cox 4,845,000 4,745,000 100,000 2.1%
Frontier 4,063,000 4,552,000 (489,000) -10.7%
Altice 4,004,000 4,105,000 (101,000) -2.5%
Mediacom 1,185,000 1,128,000 57,000 5.1%
Windstream 1,025,800 1,075,800 (50,000) -4.6%
WOW 727,600 725,700 1,900 0.3%
Cable ONE 521,724 508,317 13,407 2.6%
Fairpoint 307,100 311,440 (4,340) -1.4%
Cincinnati Bell 304,193 296,700 7,493 2.5%
94,149,417 91,894,957 2,254,460 2.5%

All of these figures come from reports published each quarter by Leichtman Research Group. Just like with cable subscribers, these large companies control over 95% of the broadband market in the country – so looking at them provides a good picture of all broadband. Not included in these numbers are the broadband customers of the smaller ISPs, the subscribers of WISPs (wireless ISPs) and customers of the various satellite services. It’s always been fuzzy about how MDUs are included in these numbers. The MDUs served by the major ISPs above are probably counted fairly well. But today there are numerous MDU owners who are buying a large broadband pipe from a fiber provider and then giving broadband to tenants. These customers are a growing demographic and are likely not included accurately in these numbers.

One of the biggest stories here is that the overall market is still growing at a significant rate of almost 2.5% per year. A little over half of the growth is coming from sales of broadband to new housing units. In the last year, with a good economy the country added almost 1.5 million new living units. But there are obviously still other homes buying broadband for the first time.

There has been a debate for years in the country about where the broadband market will top out. Those that don’t have broadband today can be put into four basic categories: 1) those that can’t afford broadband, 2) those that don’t want it 3) those that are happy with a substitute like cellular broadband, and 4) those who have zero broadband available, such as much of rural America.

It’s obvious that cable companies are outperforming telcos and Comcast, Charter and Mediacom gained more than 5% new broadband customers over the last year. But compared to more recent years the telcos have largely held their own, except for Frontier – which had numerous problems during the year including a botched transition for customers purchased from Verizon.

There are a number of industry trends that will be affecting broadband customers over the next few years:

  • We should start seeing rural customers getting broadband for the first time due to the FCC’s CAF II program. We are now in the third year of that program. The number of customers could be significant and CenturyLink estimates it will get at least a 60% penetration where it is expanding its DSL. I have seen reports from all over the country of fixed cellular wireless customers being connected by AT&T and Verizon.
  • The introduction of ‘unlimited’ cellular plans ought to make cellular broadband more attractive, at least to some demographics. While not really unlimited, the data caps of 20 GB or more per month are a huge increase over data caps from prior years.
  • There are almost a dozen companies that have filed requests with the FCC to launch new broadband satellites. The first major such launch was done recently by ViaSat which will use the new satellite to beef up its Excede product. There’s no telling how many of the other FCC filings represent real satellites or just vaporware, but there should be more competition from satellites, particular those that launch in low orbits to reduce the latency issue. The really big unknown is if Elon Musk will be able to launch the massive satellite network he has promised.
  • Lifeline programs. Companies like Comcast and AT&T have quietly launched low-price broadband options for low-income homes. The companies don’t advertise the plans broadly, but there are communities where significant numbers of customers have been added to these programs.

Cable TV Number 2Q 2017

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

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

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

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

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

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

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

 

Merger Madness

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

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

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

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

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

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

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

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

Big ISPs Want to be Regulated

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

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

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

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

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

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

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

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

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

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

Quad Bundling

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

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

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

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

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

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

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

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

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

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

Latest Industry Statistics

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

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

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

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

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

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

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

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

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

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

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

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

 

 

Can a Small Cable Company Succeed?

Today I ask the question of whether anybody small can really succeed with a cable TV product. This was prompted by the news that Cable One, one of the 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. Most of my clients would consider anybody of this size to be a large cable company. But their struggles beg the question of anybody smaller than the really giant cable companies can seriously maintain a profitable and viable cable product in today’s environment.

The drop in their cable customers was precipitated by a number of 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. We all remember that in that year 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 – including Hulu which just announced entry into this quickly growing market.

And finally, Cable One and most other cable companies are now starting to feel the impact of cord cutting. 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 lose a few percent of customers every year to Netflix and others.

The really large cable companies are not immune to these same market influences. The giants like Comcast and Charter / Spectrum are going to continue to see big increases in programming costs. Recent Comcast financials show that the company saw a 13% increase in programming cost over the last year (although some of that increase was paid to their own subsidiaries of programmers).

But the handful of giant cable companies are so big that they look like they are going to be able to offset losses in cable revenues in margins with new sources of revenues. For example, Comcast and Charter announced recently that they will be launching a jointly-provisioned cellular business that will help them grow revenues significantly instead of just treading water like smaller cable revenues. And I’ve recently written in here of all of the other ways that Comcast is still growing their business, which smaller companies are unable to duplicate.

The biggest dilemma for small cable companies is that the TV product still drives positive margin for them. While every small cable provider I know moans that they lose money on the cable product, the revenues generated from cable TV are still in excess of programming costs and almost every company I know would suffer at the bottom line if they kill 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 mean that the huge cable companies might finally be able to band together to fight back against the big rate increases. Just last week Charter 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).

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