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.

The Metrics of Offering Cable TV

Cable TV is a big topic with my clients. New ISPs struggle with the question of adding a cable TV product to their product mix. They do surveys that show that a lot of households still want cable TV bundled with broadband. My clients that offer cable TV wonder if they should drop it as a product.

Some interesting data was recently reported by the Wall Street research firm Cowan. They were looking at cable TV margins among bigger cable companies and concluded that it’s hard for anybody but the largest cable companies to be profitable with cable.

Consider Altice, a cable company with almost 3.3 million customers. Cowan calculates that Altice spends about 80% of cable revenues to buy the underlying programming – for 2018 that was cable revenues of $813 million and programming costs of $683 million. That means a gross operating margin of only 20% even before considering any of the costs of selling, billing and maintaining the product.

The really large cable companies do better. Comcast has around 21.8 million customers and Cowan calculates that programming only costs them 60% of cable revenues. The other big cable companies like Charter and Dish Networks pay about 65% of cable revenues for programming.

This raises the interesting question if anybody who doesn’t have millions of customers can make any money at cable TV? It’s unimaginable that Altice makes money in cable with a 20% gross operating margin. ISPs all tell me that the cable TV product is the big eater of staff time. Most of the calls to customer service are about cable signal quality. Cable issues cause the majority of truck rolls. When you look at the full effort required to support cable TV there is no way that it can be done inside of a 20% operating margin.

The bigger companies are a different story. You can see why Comcast still works hard to win and keep cable customers. At a 40% operating margin, each cable customer still has significant bottom-line value to the business.

Comcast must be dismayed at finally starting to lose customers to cord cutting, having lost 120,000 in the first quarter of this year. The company has done better than any other cable company in retaining customers. They’ve got the state-of-the-art settop box that continually updates with new features. They’ve pushed TV everywhere to allow TV on any device. And yet, even Comcast is seeing the inevitable declines from cord cutting as a result of high cable prices and the lure of online alternatives.

These numbers ought to show any smaller company that there is no sensible business plan for investing in a cable TV headend. I can’t imagine why anybody would buy a new cable headend today. It’s hard to imagine covering the cost of new electronics when the margins from cable barely cover operating expenses.

I’ve done the math and if a small ISP is honest with the evaluation, it’s hard to think that cable TV for a smaller company has any net operating margin after operating expenses. This puts companies in an uncomfortable position. The national average cable penetration is still 70%, although now dropping at 6% of market annually. That still means that a lot of customers want to buy traditional cable TV and they are going to buy it from the ISP who offers cable and broadband together. All of the surveys we’ve done at CCG show that there is still a sizable portion of the residential market who won’t buy broadband without cable TV.

I hear about ISPs exiting the cable business every month. That’s the ultimate in cord cutting when the ISP drops the cable product before the customers disappear on their own.

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.

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.

Comcast the ISP

Occasionally I see a statistic that really surprises me. I just read a quote from Dave Watson, the President of Comcast Cable where he told investors that Comcast has an overall 47% broadband market penetration rate, meaning that 47% of the households in their footprint buy broadband from Comcast. I would have guessed that their market penetration rate was higher. He did say that they have markets where they exceed a 60% market share.

There are a few reasons why their overall market share isn’t higher. For one thing, the company overlaps a lot of the same big markets where Verizon competes with fiber-based FiOS. The company also competes with fiber overbuilders like US Internet in Minneapolis and Sonic in the Bay Area that are chipping away at broadband customers. The company is also competing against a few municipal fiber overbuilders like in Chattanooga where the city-based fiber ISP has won the lion’s share of the market. It’s clear that fiber is a formidable competitor for any cable company.

Comcast also faces significant competition in the MDU market where there are numerous companies vying to serve large apartment buildings and complexes. For example, a big percentage of AT&T’s fiber expansion goal to pass 12 potential customers has been achieved through building fiber to large MDUs all around the country. There are also a number of successful ISPs that compete nationwide in the large MDU market.

Comcast, like all of the big cable companies, was a latecomer in competing for the business market. Historically the cable companies didn’t build their network in business districts and the telcos and CLECs gained early control of this market. Comcast and other cable companies now compete vigorously in the business market, but this is the one market segment that is competitive almost everywhere.

It is clear that Comcast is winning the battle against DSL. Comcast added 1.35 million broadband customers in 2018, while the telcos collectively lost nearly half a million customers.

I believe that the secret to the recent Comcast success is from offering faster broadband speeds. The company has upgraded to DOCSIS 3.1 and now offers gigabit broadband speeds. More importantly, the company has unilaterally increased speeds across-the-board several times to give them a significant speed advantage over DSL. The most recent speed increase last year increased base product speeds to 200 Mbps. It’s now an easy marketing advantage for the company to contrast this with the top DSL speed of 50 Mbps. Comcast is betting that speed wins and looking at the trend of their customers versus the telcos they seem to be right.

Comcast is also benefitting from the fact that many homes now find themselves bumping against the speed limits on slower products. Many homes that use multiple devices simultaneously are starting to find that a broadband speed of even 50 Mbps isn’t adequate for the way they want to use broadband. We are finally reaching the point where even the best DSL is becoming obsolete for many families. This trend is certainly accelerating and we saw 3.5 million new cord-cutting households last year who now watch all video online.

Even knowing all of the above market trends I was still surprised by the 47% market share. My firm does broadband surveys and we’ve never seen a Comcast or Charter market share below 60% in the markets we’ve studied. Of course, our experience is biased by the fact that we are only studying markets where somebody is thinking about building fiber, and there are undoubtedly Comcast markets that are considerably higher or lower than the 47% average market share.

I expect the Comcast market share to keep climbing. I think they have now won the war with DSL and in those markets where they aren’t facing a fiber competitor they will continue to pick up customers who realize they need more speed. As the household demand for broadband continues to double every three years, the migration from DSL to cable broadband is likely to accelerate.

I think it’s likely that telcos with copper networks are starting to lose steam. As the telcos keep losing DSL customers one has to wonder how much money the telcos will spend on advertising to support a sinking market. Just like I’m always surprised when I find out that there are still a few million dial-up customers remaining across the country, I think we have reached the tipping point on DSL, and DSL will start to be considered as a dead and dying technology. It might take another decade for DSL to finally die, but that slow death is finally underway.

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.

ISPs Are Violating the Old Net Neutrality Rules

It’s been just over a year since the FCC repealed net neutrality. The FCC’s case is being appealed and oral arguments are underway in the appeal as I write this blog. One would have to assume that until that appeal is finished that the big ISPs will be on their best behavior. Even so, the press has covered a number of ISP actions during the last year that would have violated net neutrality if the old rules were still in place.

It’s not surprising that the cellular carriers were the first ones to violate the old net neutrality rules. This is the most competitive part of the industry and the cellular carriers are not going to miss any opportunity to gain a marketing edge.

AT&T is openly advertising that cellular customers can stream the company’s DirecTV Now product without it counting against monthly data caps. Meanwhile, all of the competing video services like Sling TV, Paystation Vue, YouTube TV, Netflix or Amazon Prime count against AT&T data caps – and video can quickly kill a monthly data plan download allotment. AT&T’s behavior is almost a pure textbook example of why net neutrality rules were put into place – to stop ISPs from putting competitor’s products at an automatic disadvantage. AT&T is the biggest cellular provider in the country and this creates a huge advantage for DirecTV Now. All of the major cellular carriers are doing something similar in allowing some video to not count against the monthly data cap, but AT&T is the only one pushing their own video product.

In November a large study of 100,000 cellphone users by Northeastern University and the University of Massachusetts showed that Sprint was throttling Skype. This is not something that the carrier announced, but it’s a clear case of pushing web traffic to the ‘Internet slow lane’. We can only speculate why Sprint would do this, but regardless of their motivation this is clearly a violation of net neutrality.

This same study showed numerous incidents where all of the major cellular carriers throttled video services at times. YouTube was the number one target of throttling, followed by Netflix, Amazon Prime, and the NBC Sports app. This throttling wasn’t as widespread as Sprint’s throttling of Skype, but the carriers must have algorithms in their network that throttles specific video traffic when cell sites get busy. In contrast to the big carriers, the smaller independent cellular carrier C.Spire had almost no instances of differentiation among video streams.

Practices that might violate net neutrality were not limited to cellular carriers. For example, Verizon FiOS recently began giving free Netflix for a year to new broadband customers. AT&T also started giving out free HBO to new customers last year. This practice is more subtle than the cellular carrier practice of blocking or throttling content. One of the purposes of net neutrality was for ISPs to not discriminate against web traffic. By giving away free video services the landline broadband companies are promoting specific web services over competitors.

This doesn’t sound harmful, but the discussions in the net neutrality order warned about a future where the biggest ISPs would partner with a handful of big web services like Facebook or Netflix to the detriment of all smaller and start-up web services. A new video service will have a much harder time gaining customers if the biggest ISPs are giving away their competitors for free.

There are probably more bad practices going on that we don’t know about. We wouldn’t have known about the cellular throttling of services without the big study. A lot of discrimination can be done through the network routing practices of the ISPs, which are hard to prove. For example, I’ve been seeing a growing number of complaints from consumers recently who are having trouble with streaming video services. If you recall, net neutrality first gained traction when it became known that the big ISPs like Comcast were blatantly interfering with Netflix streaming. There is nothing today to stop the big ISPs from implementing network practices that degrade certain kinds of traffic. There is also nothing stopping them from demanding payments from web services like Netflix so that their product is delivered cleanly.

Interestingly, most of the big ISPs made a public pledge to not violate the spirit of net neutrality even if the rules were abolished. That seems to be a hollow promise that was to soothe the public that worried about the end if net neutrality. The FCC implemented net neutrality to protect the open Internet. The biggest ISPs have virtual monopolies in most markets and public opinion is rarely going to change an ISP behavior if the ISP decides that the monetary gain is worth the public unhappiness. Broadband customers don’t have a lot of options to change providers and Cable broadband is becoming a near-monopoly in urban areas. There is no way for a consumer to avoid the bad practices of the cellular companies if they all engage in the same bad practices.

There is at least some chance that the courts will overturn the FCC repeal of net neutrality, but that seems unlikely to me. If the ISPs win in court and start blocking traffic and discriminating against web traffic it does seem likely that some future FCC or Congress will reinstitute net neutrality and starts the fight all over again. Regardless of the court’s decision, I think we are a long way from hearing the last about net neutrality.

Why Big ISPs Screw Up

I was recently joking with a colleague about some of the really dumb things that some of the big ISPs do – those things that get negative press or that make customers permanently dislike them. But after thinking about it a bit, it struck me that bad behavior by the big companies is almost inevitable – it’s a challenge for a big company to not behave badly. I can think of a number of reasons for the poor decisions that big ISPs seem to repeatedly make.

Good Intentions but Bad Policies. Some of the ugliest stories in the press from our industry have come from Comcast customer service. Customers have recorded customer service representatives saying some of the most awful things. Comcast executives have often been quoted as saying that they want to do a better job of customer service and the company has thrown big bucks at the issue over the last decade to try to improve.

But Comcast has corporate policies that undo all of their good intentions. Some of the most memorable press stories came from customer service reps who are compensated for stopping customers from disconnecting service or for upselling additional services to customers. Win-back programs and upselling are good for the Comcast bottom line, but they tempt poorly paid customer service reps into saying anything to stop a customer from disconnecting or entice a customer service rep to sneak unwanted products onto a customer’s bill. The bottom line is that policies that promote good behavior go out the window when employees are compensated for bad behavior.

Decentralized Management. I remember reading last year about the big push at Verizon to bring all of their fiber assets under one regime. The company built fiber over the years under a lot of different business units and there has been no centralized fiber inventory. This has to have cost Verizon a fortune over the years with lost revenue opportunities on fiber that already exists. An outsider like me looks at this and wonders why something this common sense wasn’t done fifteen years ago. Unfortunately, the poor communications inside the company is a natural consequence of operating different business units, each in silos. The FiOS folks never knew what the enterprise or the cellular folks were doing, and so the company frittered away the huge synergies that could have been gained by making all fiber available to all business units. We’ve seen attempts at the big ISPs to make the kind of consolidation Verizon is doing, but if they aren’t careful, in time they’ll slip back to the old bad practices.

No Emphasis on Being Good Corporate Citizens. I worked at Southwestern Bell pre-divestiture. There were some negative sides from being a giant monopoly,  but the company also put a lot of effort into instilling the message internally that the company had a nationwide mandate to do a good job. The company constantly extolled its accomplishments to employees and effectively indoctrinated them into being good citizens. I happened to sit close to the person who took ‘executive’ complaints – complaints from customers that had escalated to upper management. The company made a legitimate effort to deal with every problem that made it that high in the company. Employees were rewarded for loyalty and good behavior with lifetime jobs – phone company people were joked to have bell-shaped heads.

Big ISPs no longer promise jobs for life and working at a big ISP today is just a job. I know a mountain of people who currently work for the big ISPs and none of them have that same esprit de corps that was normal at Ma Bell.

Quarterly Profit-Driven. A lot of the problems I see from the big ISPs come from the modern emphasis on quarterly earnings. This emphasis permeates down into the ranks of management at an ISP. For example, a department head might decide to not make a major repair or upgrade if it causes a blip in the department’s budget. The constant drive for quarterly earnings improvements drives ISPs to lay-off needed technicians to meet an earnings goal. It drives companies to raise rates even when they haven’t increased costs. It makes companies chase new shiny ideas like 5G even if the technology is half-baked and premature. Unfortunately, Wall Street matters more than both employees and customers – and it shows.

Comcast’s Quiet Expansion

It’s been conventional wisdom in the industry that cable companies stick to their historic cable system boundaries and don’t really expand much. In much of the country, this is well understood and everybody can point to customers that have lived for decades just a house or two past the end of the coaxial cable network.

However, not all cable companies have stuck with this historic entrenchment. A good case in point is Comcast, which passed 53.8 million homes in 2013 but had grown that to 57.5 million passings by the end of 2017. A few of the new 3.7 million new passings came from the purchase of small cable systems, but most came through the growth of the Comcast network.

Many of the new passings came about as the result of the continued growth of urban America. As a country we’re still seeing rural residents migrate to urban centers – which are growing while rural America is mostly stagnant or even shrinking. Recent years have seen some of the largest ever growth in new housing construction – 1.5 million new living units over the last year – and Comcast gets its share of these opportunities in its franchise areas.

But the company is also expanding outward from its core cable franchise areas where that makes sense. This has mostly been done quietly with a street added here, a small neighborhood added there, and new subdivisions always pursued; Comcast is obviously looking around for growth when it can be done affordably.

The most surprising source of Comcast growth comes from expansion into areas served by other cable companies. Historically there was a gentleman’s agreement in the cable industry to not poach on neighboring franchises, but Comcast is no longer sticking to that industry norm. Over the last few years, Comcast has gotten franchises to operate in communities already served by other cable companies.

In 2017 Comcast got a franchise in Rochester, New Hampshire in an area already served by Atlantic Broadband. In 2018 Comcast got franchises in Waterford and New London, Connecticut in areas also served by Atlantic Broadband. Last year Comcast also got franchises to operate in five communities in Pennsylvania operated by Blue Ridge Cable – Warwick Township, Warwick Borough, Ephrata Township, Ephrata Borough and Lititz.

Incumbent cable companies have rarely competed with each other. One of the few exceptions was Midcontinent that overbuilt CableONE in Fargo, North Dakota in 2013. There are also two overbuilders that have built competing cable networks – RCN and WideOpenWest – but these companies started as overbuilders and were not incumbent providers.

For now, it looks like Comcast might be going after these markets to get lucrative business customers. For instance, New London, Connecticut is the home to two colleges and the Coast Guard Academy. There are some large businesses and medical centers in some of the towns in Pennsylvania. Even if Comcast only goes after large businesses that can be a big blow to the smaller cable companies already serving these markets. When I create business plans I always refer to the revenues from the few biggest customers in a community as ‘home-run’ revenues because just a few customers can make or break a business plan. Comcast will do great harm to its neighbors if they pick off their home-run customers.

Comcast has gotten so large that they probably don’t care any longer about the historic gentleman’s agreements that put a fence around a franchise area. Comcast is under constant pressure to grow revenues and profits and it’s almost inevitable that they’ll chase anything they view as low-hanging fruit. This is one of the characteristics of companies that become virtual monopolies – they almost can’t stop themselves from engaging in business practices that make money. A company as big as Comcast doesn’t make all of the decisions at the corporate level – rather, they give revenue and earnings targets to differrent parts of the company and those business units often decide to chase revenues in ways the parent might not have dictated. In many big corporations it is the bonus structure that often drives local decisions rather than corporate policy.

It will be interesting to see how this might change the nature of cable company cooperation. The cable companies have been incredibly effective in having a unified message across the country in terms of lobbying at the federal, state and local levels – what was good for one was good for all. But that’s no longer the case if Comcast starts competing with smaller neighboring cable companies. We saw this same phenomenon a few decades ago in the telephone industry and the small telcos all started lobbying separately from the big companies. The small and large telcos still sometimes agree on issues, but often they do not. It’s almost inevitable that the unified voice of the cable industry can’t survive competition between cable companies – but I also suspect Comcast doesn’t care about that.