How Safe is Your Network?

Last week Comcast suffered a major broadband outage. The worst imaginable set of events occurred when there two simultaneous fiber cuts on major legs of their backbone – one between Chicago and New York and one between Ashburn, Virginia and South Carolina. In case you don’t know, Ashburn is the home of the major Internet POP serving Washington DC and surrounding cities.

This is a network planner’s worth nightmare. Planners always try to build redundancy into fiber routes so that the network won’t crash from a single fiber cut. Modern backbone electronics can be set to automatically forward traffic in both directions around a ring so that service isn’t interrupted in the case of a fiber cut or failure of ring electronics somewhere along the ring. But rings using this technology can’t withstand two simultaneous cuts.

What was a bit surprising to me was the failure of a large part of the Comcast network with fiber cuts that were so far apart. It seems unlikely that the company has a fiber ring that sends all Internet traffic in such a large circle. It’s more likely that the company has centralized one or more of their routing functions, such as DNS routing in one place on the network and the fiber cuts might have isolated that key function, which would shut down their Internet product.

Redundancy is a big concern for most smaller network owners. Lack of redundancy was one of the major issues that drove Cook County, Minnesota to build their own fiber network. There is no cable provider in the county and their entire telecom network was provided by CenturyLink. Tourism is the major driver of the economy and a decade ago there was a cut in the CenturyLink fiber from Duluth that isolated the county during peak tourist season. That meant that the Internet, telephones, and cell phones didn’t work. Businesses couldn’t take credit cards, restaurants and hotels couldn’t take reservations, and family members on vacation couldn’t communicate with each other. This prompted the County to pursue a fiber network that included creating redundancy traffic in and out of the county. The network was ultimately built and operated by the local power cooperative, and today there is greatly reduced chance of a major telecom outage.

Even where there is redundancy there can be outages. One of my clients operates a large statewide fiber network that stretches for hundreds of miles. They followed good engineering practice and scheduled an upgrade of the ring electronics after midnight. While one of the nodes was being upgraded the fiber was cut on a different part of the network when a truck knocked down a telephone pole, and the whole network went dark. Fiber cuts in the middle of the night are somewhat rare, but they happen.

Whenever possible fiber engineers also build redundancy into a local fiber network. They might build a ring connecting the fiber huts serving neighborhoods so that the network keeps functioning with a cut along the ring. It’s nearly impossible to design such redundancy in the last-mile loop, but fiber cuts in the last mile only isolate homes associated with the specific fiber.

But just like with Comcast and Cook County, many local networks have a hard time creating redundancy outside of their immediate network. In geographically remote areas it’s often impossible to find a second secure route to the Internet, leaving a network, or whole communities vulnerable to a fiber cut somewhere outside their area.

Unfortunately, it’s getting easier for fiber providers to run into the same kind of issue that hit Comcast. We are migrating numerous functions to the cloud and having redundant fiber routing does not always mean that there is an automatic redundant connection made to a key cloud server. I have clients that are now relying on the cloud for all sorts of services such as VoIP, cable TV programming, DNS routing for the Internet, the use of cloud-based operational software, etc. These ISPs may have a redundant path to the Internet, but still have only one path to get to the company providing their cable TV signal or DNS routing.

The Comcast outage should prompt companies to look again at redundancy. Don’t assume that every function in the cloud is redundant even if you have a redundant connection to the Internet.

Regulating Over-the-Top Video

I know several cable head-end owners that are developing over-the-top video products to deliver over traditional cable networks. I define that to be a video product that is streamed to customers over a broadband connection and not delivered to customers through a settop box or equivalent. The industry now has plenty of examples of OTT services such as Netflix, Amazon Prime, Sling TV, Hulu and a hundred others.

While the FCC has walked almost totally away from broadband regulation there are still a lot of regulations affecting cable TV, so today I am looking at the ramifications of streaming programming to customers instead of delivering the signal in a more traditional way. Why would a company choose to stream content? The most obvious benefit is the elimination of settop boxes. OTT services only require an app on the receiving device, which can be a smart TV, desktop, laptop, tablet or cellphone. Customers largely dislike settop boxes and seem to love the ability to receive content on any device in their home. A provider that pairs OTT video delivery with a cloud DVR has replaced all of the functions of the settop box.

There are a few cable companies that have been doing this. Comcast today offers a streaming service they label as Xfinity Instant TV. This package starts with a package of ten channels including local broadcast networks. They then offer 3 add-on options: a kids and family package for $10, an entertainment package for $15 and a sports and news package for $35. Comcast also touts that a customer can choose to stream the content to any of the millions of Comcast WiFi hotspots, not only at their homes.

It’s an interesting tactic for Comcast to undertake, because they have invested huge R&D dollars into developing their own X1 settop box that is the best in the industry. The company is clearly using this product to satisfy a specific market segment which is likely those considering cutting the cord or those that want to be able to easily download to any device.

A second big benefit to Comcast is that they save a lot of money on programming by offering smaller channel line-ups. Traditional cable packages generally include a lot of channels that customers don’t watch but which still must be paid for. Comcast would much prefer to sell a customer a smaller channel line-up than to have them walk away from all Comcast programming.

The third reason why a cable provider might want to stream content is that it lets them argue that they can selectively walk away from cable regulations. The only real difference between Comcast’s OTT and their traditional cable products is the technology used to get a channel to a customer. From a regulatory perspective this looks a lot like the regulatory discussions we had for years about VoIP – does changing the technology somehow create a different product and different regulations. Before VoIP there were numerous technology changes in the way calls were delivered – open wire, party-lines, digitized voice on T-carrier, etc. – but none of the technology upgrades every changed the way that voice was regulated.

I can’t see any reason why Comcast is allowed, from a regulatory perspective, to stream their ITT content over their cable network. The company is clearly violating the rules that require the creation of specific tiers such as basic, expanded basic and premium. What seems to be happening is that regulators are deciding not to regulate. You might recall that three or four years ago the FCC opened investigation this and other video issue – for example, they wanted to explore if video delivered on the web needs to be regulated. That docket also asked about IP video being delivered over a cable system. The FCC never acted on that docket, and I chalk that up to the explosion of online video content. The public voted with their pocketbooks to support streaming video and the FCC let the topic die.  There are arguments that can be made for regulating streaming video, particularly when it’s delivered over the same physical network as traditional cable TV, like in the case with Comcast.

Clearly the FCC is not going to address the issue, and so the technology an lack of regulation ought to be made available to many other cable providers. But that doesn’t mean that the controversy will be over. I predict that the next battleground will be the taxation of streaming video. Comcast would gain a competitive advantage over competitors if they don’t have to pay franchise fees for streaming content. In fact, a cable company can argue they don’t need a franchise if they choose to stream all of their content.

It’s somewhat ironic that we are likely to have these regulatory fights with the cable product – a product that is clearly dying. Customers are demanding alternatives to traditional cable TV, yet the FCC is still saddled with the cable regulations handed to them by Congress. One nightmare scenario for Comcast and the industry would be if some competitor sues a cable company to stop the streaming product – because that would require the regulators, and ultimately the courts to address the issue. It’s not inconceivable that a court could decide that the Comcast streaming service is in violation of the FCC rules that define channel line-ups. Congress could fix this issue easily, but unless they do away with the current laws there will always be a background regulatory threat hanging over anybody that elect to use the product.

Comcast Dismantles Data Throttling

On June 11 Comcast announced they had dismantled a congestion management system that had been in place since 2008. This system was used to throttle data speeds for large users of residential data. The company says that their networks are now robust enough that they no longer need to throttle users and that they system wasn’t used for the last year.

Comcast implemented the congestion management system in 2008 after it had been caught throttling traffic to and from Bit Torrent. The FCC said the throttling was discriminator and ordered Comcast to cease the practice. Comcast responded to the FCC with the introduction of the congestion management system that cut back usage for all large residential data users, with what Comcast said was a non-discriminatory basis.

At the time Comcast claimed that large data users, who at that time were exchanging video files, were slowing down their network – and they were probably right. The ISP industry has been blindsided twice in my memory by huge increases in demand for bandwidth. The first time was in the 1990s when Napster and many others promoted the exchange of music MP3 files. The same thing happened a decade ago when people started sharing video files – often pirated copy of the latest movies.

To be fair to Comcast, a decade ago the number one complaint about cable company broadband was that speeds bogged down during the evening prime time hours – the time when most customers wanted to use the network. The Comcast throttling was an attempt to lower the network congestion during the busiest evening hours. Comcast says the throttling system is no longer needed since the widespread implementation of DOCSIS and improvements in backhaul have eliminated many of the network bottlenecks.

Comcast now offers gigabit download speeds in many markets. I suspect that they are relying that only a small percentage of their customers will buy and use this big bandwidth in a given neighborhood, because a significant number of gigabit users could still swamp an individual neighborhood node. I wonder if the company would reinstitute the throttling system again should their network become stressed with some future unexpected surge in broadband traffic. It’s possible that some big bandwidth application such as telepresence could go viral and could swamp their data networks like happened in the past with music files and then video.

Interestingly, the company still maintains customer data caps. Any customer that uses more than 1 terabyte in a month must pay $10 for each extra 50 gigabytes or pay $50 extra to get unlimited data. Comcast never directly said that the data caps were for congestion management, although they often hinted that was the reason for the caps.

The official explanation of the data caps has been that heavy users need to pay more since they use the network more. Comcast has always said that they use the revenues from data caps to pay for the needed upgrades for the network. But this seems a little ingenuous from a company that generated $21.4 billion in free cash in 2017 – nearly $1.8 billion per month.

Comcast is not the only ISP that has been throttling Internet traffic. All four major wireless carriers throttle big data users at some point. T-Mobile is the most generous and starts throttling after 50 GB of month usage while the other three big wireless carriers throttle after 20 – 25 GB per month.

A more insidious form of data throttling is the use of bursting technology that provides faster broadband speeds for the first minute or two of any given broadband session. During this first minute customers will get relatively fast speeds – often set at the level of their subscription – but if the session is prolonged past that short time limit then speeds drop significantly. This practice fools customers into thinking that they get the speeds they have subscribed to – which is true for the short duration of the burst – but is not true when downloading a large file or streaming data for more than a minute or two. The carriers boast about the benefits of data bursts by saying they give extra broadband for each request – but they are really using the technology to throttle data for any prolonged data demands.

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.

Comcast Broadband Bundles

Comcast recently announced unilateral broadband speed increases for some customers. Customers with current 60 Mbps service today are being increased to 150 Mbps, those with 150 Mbps are moving up to 250 Mbps, and those with 250 Mbps are being bumped up to 400 Mbps or 1 Gbps depending upon their cable package.

The Houston Chronicle reported that the speed upgrades are only available to customers who have a cable package and an X1 settop box. This article has spawned a number of outraged reactions from customers and industry journalists.

This is not news, and in my experience has been a long-term practice of the company. When there is an event like this speed increase the Comcast practice percolates up to the surface again. The company has been reserving their fastest broadband speeds for customers who buy cable TV for years. When I moved to Florida five years ago Comcast would not sell me standalone broadband any faster than 20 Mbps unless I purchased a cable package.

That speed was not adequate for my family and home office and so I was corralled into buying their basic TV package in order to get 100 Mbps broadband. They wouldn’t let me buy the faster standalone broadband at any price. The cable settop box went immediately into my closet and was never plugged in. The $20 basic TV package ended up costing me over $40 per month after layering on the settop box and local programming fees. I felt like I was being extorted every time I paid my Comcast bill. I called periodically to try to drop the cable package but was always told that would mean reducing my broadband speed.

The articles I’ve read assume that this pricing structure is intended to hurt cord cutters. But when this happened to me five years ago there were very few cord cutters. I’ve always assumed that Comcast wanted to maintain cable customer counts to please Wall Street and were willing to strongarm customers to do so. I was a cable customer in terms of counting, but I never watched any of the TV I was forced to buy. I always wondered how many other people were in the same position. For the last few years Comcast has lost fewer cable customers than the other big cable companies and perhaps this one policy is a big part of the reason for that.

Today it’s easier to make the argument that this is to punish cord cutters. This policy clearly harms those who refuse to buy the company’s cable products by forcing them into the company’s smallest bandwidth data products. Last year Comcast declared that they are now a broadband company and not just a traditional cable company – but this policy challenges that assertion.

Comcast is further punishing card cutters by enforcing their data caps. Due to public outcry a few years ago they raised the monthly data limit to one terabyte. While that sounds generous, it’s a number that is not that hard to hit for a house full of cord cutters. Over time more households will hit that limit and have to pay even more money for their broadband.

This policy is a clear example of monopolist behavior. I’m positive that this policy is not invoked in those markets where Comcast is competing with a fiber overbuilder. There is no better way to identify the monopolist policies than by seeing what gets waived in competitive markets.

Unfortunately for the public there is no recourse to monopolistic behavior. The FCC has largely washed their hands of broadband regulations and is going to turn a deaf ear to issues like this. Comcast and the other big ISPs are now emboldened to implement any policies that will maximize their revenues at the expense of customers.

It’s not hard to understand some of the ramifications of this policy. My 100 Mbps connection from Comcast was costing me over $100 per month and this is both a ridiculous price and unaffordable to many homes. The scariest thing about these kinds of policies is that the cable company monopoly is strengthening as they chase out the last remnants of DSL. There will be huge numbers of markets where Comcast and the other large cable companies will be the only realistic broadband option.

I’ve noted in a few blogs that there seem to be consensus on Wall Street that the big ISPs are going to significantly increase broadband prices over the next few years. They continue to also bill outrageous rates for a cable modem and slap on hidden fees to further jack up prices. When you layer in policies like this one and data caps it’s clear that Comcast cares about profits a whole lot more than they care if households can afford broadband. I know that’s inevitable monopoly behavior, and in the ideal world the federal government would step in to stop the worst monopoly abuses.

Metering Broadband

A lot of the controversy about Comcast data caps disappeared last year when they raised the monthly threshold for data caps from 300 gigabytes to 1 terabyte. But lately I’ve been seeing folks complaining about being charged for exceeding the 1 TB data cap – so Comcast is still enforcing their data caps rules.

In order to enforce a data cap an ISP has to somehow meter the usage. It appears that in a lot of cases ISPs do a lousy job of measuring usage. Not all ISPs have data caps. The biggest ISPs that have them include Comcast, AT&T, CenturyLink for DSL, Cox and Mediacom. But even these ISPs don’t enforce data caps everywhere, like Comcast not enforcing them where they compete directly against Verizon FiOS.

Many customer home routers can measure usage and there are reports of cases where Comcast data usage measurements are massively different than what is being seen at the home. For example, there are customers who have seen big spikes in data measurement from Comcast at a time when their routers were disconnected or when power was out to the home. There are many customers who claim the Comcast readings always greatly exceed what they are seeing at their home routers.

Data caps matter because customer that exceed the caps get charged a fee. Comcast charges $10 for each 50 GB of monthly over the cap. Mediacom has the same fees, but with much smaller data caps such as a 150 GB monthly cap on customers with a 60 Mbps product.

It’s not hard to imagine homes now exceeding the Comcast data cap limit. Before I left Comcast a year ago they said that my family of three was using 600 – 700 GB per month. Since I didn’t measure my own usage I have no idea if their numbers were inflated. If my measurements were accurate it’s not hard to imagine somebody with several kids at home exceeding the 1 TB. The ISPs claim that only a small percentage of customers hit the data cap limits – but in world where data usage keep growing exponentially each year there are more homes that will hit the limit as time goes by.

What I find interesting is that there is zero regulation of the ISP data ‘meters’. Every other kind of meter that is used as a way to bill customers are regulated. Utilities selling water, electric or natural gas must use meters that are certified to be accurate. Meters on gas pumps are checked regularly for accuracy.

But there is nobody monitoring the ISPs and the way they are measuring data usage. The FCC effectively washed their hands from regulating ISPs for anything broadband when they killed Title II regulation of broadband. Theoretically the Federal Trade Commission could tackle the issue, but they are not required to do so. They regulate interactions with customers in all industries and can select the cases they want to pursue.

There are a few obvious reasons why the readings from an ISP would differ from a home, even under ideal conditions. ISPs measure usage at their network hub while a customer measurement happens at the home. There are always packets lost in the network due to interference or noise on the network, particularly with older copper and coaxial networks. The ISP would be counting all data passing through the hub as usage although many of the packets never make it to customers. But when you read some of the horror stories where homes that don’t watch video see daily readings from Comcast of over 100 GB in usage you know that there is something wrong in the way that Comcast is measuring usage. It has to be a daunting task to measure the usage directed for thousands of users simultaneously and obviously Comcast has problems in their measurement algorithms.

I’ve written about data caps before. It’s obvious that the caps are just a way for ISPs to charge more money, and it’s a gigantic amount of extra revenue if Comcast can bill $10 per month extra to only a few percent of their 23 million customers. Anybody that understand the math behind the cost of broadband understands that a $10 extra charge for 50 GB of usage is almost 100% profit. It doesn’t cost the ISP anything close to $10 for the connections for the first terabyte let alone an incrementally small additional amount. And there certainly is no cost at all if the Comcast meters are billing for phantom usage.

I don’t know that there is any fix for this. However, it’s clear that every customer being charged for exceeding data caps will switch to a new ISP at the first opportunity. The big ISPs wonder why many of their customers loathe them, and this is just one more way for a big ISP to antagonize their customers. It’s why every ISP that builds a fiber network to compete against a big cable companies understand that they will almost automatically get 30% of the market due to customers who have come to hate their cable ISP.

Convergence

Even a decade ago it was apparent that the telecom industry was headed towards convergence. By that, I mean that the various cable companies, telcos and wireless companies are expanding service lines and are starting to compete with each other in areas that were unimaginable even a few years ago.

Comcast is the best example of this. Their CEO Brian Roberts was quoted last year as saying that the company was now in all of the business lines available to it. Compare today’s Comcast with the company a decade ago. Then they were just becoming a triple play provider by adding voice to their product line-up. Since then they have added a lot more business lines.

A decade ago Comcast barely went after business customers and didn’t even own network in many business districts and industrial parks – and now they are a major provider of business services. The company recently added cellular service and it appears they are adding customers at a furious pace. They are becoming a major player in home security. The company has a thriving product line selling residential smart home services. They even started bundling home solar panels with their residential product line recently.

The company has even stepped up their traditional cable service to do better against the satellite providers. They’ve developed their own settop box that is said to be the best in the industry. And they have bought a number of the cable programmers like NBC, giving them a margin advantage over any competitor for video.

It seems to me like everybody else wants to be Comcast. Consider AT&T. A decade ago they were a traditional telco. They operated a huge copper network for residential broadband and telephone service and owned the country’s largest fiber network for providing wholesale transport and business services. They were also one of the two largest cellular companies, and with Verizon controlled the vast majority of that business.

AT&T not only added cable TV service to their product line, but they bought DirecTV and become a major video provider. They are trying hard to buy programming and content by merging with Time Warner. The company has been aggressive building fiber to large apartment complexes and has become a major player in the MDU market that used to be almost exclusively controlled by the cable incumbents. The company has also been building a lot of fiber to better compete head-to-head with Comcast and other cable companies that have faster residential broadband.

Verizon took a different path and competed head-to-head with Comcast in the northeast even a decade ago with its FiOS fiber network. The company continues to buy smaller regional fiber providers like XO to beef up its business and fiber networks. Verizon has announced that it intends to roar back into the residential market by use of small cell 5G over the next decade. And Verizon continues to thrive as a cellular carrier.

Even smaller companies like CenturyLink are looking a lot like their bigger competitors. The company had added cable to its bundle. They built fiber past almost a million passings last year to provide more robust competition for broadband speeds. And they bought Level 3 to become a major player for transport and business services.

But these big ISPs are not the only ones crossing into new product lines. Consider T-Mobile. In a move that was unthinkable even a few years ago they are making a major play to bundle video content with their cellular service – making them a direct competitor of all of the ISPs for the market segment of folks who are happy with mobile video rather than a landline connection. T-Mobile is pushing the other cellular providers to do the same.

And there are other national competitors on the horizon. For example, there are several satellite companies like SpaceX and OneWeb that are likely to compete nationally with bundles similar to the other ISPs. I also think we’ll see new competitors spring up and compete with 5G last-mile networks as that technology matures.

It’s going to be interesting to see the winners and losers over the next decade. Right now the cable companies are approaching a near monopoly in many markets for broadband. The only way these other competitors are going to survive and thrive is to chop away at Comcast and the other large cable companies. But at the same time the cable companies will be carving cellular customers. For those like me who follow the industry it’s going to be interesting to watch.

The Lack of Broadband Competition

There is one statistic from the FCC annual report on the state of broadband that I’ve been meaning to write about. There is still a massive lack of broadband competition at speeds that most households are coming to think of as broadband.

Here are the key statistics from that report:

  • 13% of all households can’t get broadband that meets the FCC’s definition of 25/3 Mbps
  • 31% of homes have access to 25/3 Mbps, but not speeds of 100 Mbps
  • 15% have access to 100 Mbps from more than one provider
  • 41% have access to 100 Mbps from only one provider

It’s the last statistic that I find astounding. The current FCC declared with this report that the state of broadband in the country is healthy and that the market is taking care of the country’s broadband needs. I’ve written number blogs about the households in the bottom 13% that have little or no broadband, but I want to look closer at the top two categories.

Households in the 15% category are in markets where there is a fiber provider in addition to the incumbent cable company. The biggest fiber provider is still Verizon FiOS, but there are numerous others building fiber like AT&T, CenturyLink, Google Fiber, smaller telcos, small fiber overbuilders and municipalities.

This means that 41% of households (51 million homes) only have one option for fast broadband – the cable company. I see numerous problems related to this huge monopoly that has been won by the big cable companies. Consider the following:

  • The US already has some of the most expensive broadband in the developed world. The high prices are directly the result of the lack of competition.
  • This lack of competition is likely the driving factor for why most of the big ISPs in the US are rated at the bottom of all US corporations in terms of customer service. We know that customer service improves in markets where is broadband competition, but the big ISPs don’t make the same effort elsewhere.
  • We also know that competition between a cable company and a smaller fiber overbuilder lowers broadband prices. For example, there are markets where competitors like Google have set the price of a gigabit connection at $70, and the cable companies generally come close to matching the lower price. But preliminary pricing from Comcast and Charter for their new gigabit products where there are no competitors will be significantly north of $100 per month.
  • Even where there are competing networks, if both networks are owned by large ISPs we see duopoly competition where the big ISPs don’t push each other on price. For example, Comcast largely is able to offer the same prices when competing against Verizon FiOS as it does in markets where there is no fiber provider.
  • Industry analysts expect the big ISPs to start raising broadband rates for various reasons. The ISPs continue to lose telephone and cable customers and the national penetration rate for broadband is nearing a market saturation point. In order to satisfy Wall Street the big ISPs will have little choice other than raising broadband prices to maintain earnings growth.

I’m sure that the households in the bottom 13% of the market that can’t get good broadband are not sympathetic to those who can only buy fast broadband from one provider. But these statistics say that 41% of the whole market are dealing with a monopoly situation for fast broadband. Telecom is supposed to be a competitive business – but for the majority of the country the competitors have never showed up. For the FCC to declare that we have a healthy broadband market astounds me when so many households are hostage to a broadband monopoly.

There is always the chance that over the next decade that fixed 5G will bring more broadband competition. My guess, however, is that at least for a few years that this is going to be a lot more competition by press release than real competition. Deploying gigabit 5G like the big ISPs are all touting is going to require a lot more fiber than we have in place today. Deploying 5G without fiber backhaul might still result in decent broadband, but it’s not going to be the robust gigabit product that the ISPs are touting. But even poorly deployed 5G networks might bring 100+ Mbps broadband to a lot more homes after the technology gets a little more mature.

Unfortunately there is also the risk that 5G might just result in a lot more duopoly competition instead of real competition. If 5G is mostly deployed by big ISPs like Verizon and AT&T there is no reason to think that they will compete on price. Our only hope for real market competition is to see multiple non-traditional ISPs who will compete on price. However, it’s so tempting for ISPs to ride the coattails of the big ISPs in terms of pricing that 5G might bring more of the same high prices rather than real competition.

The Cable Industry – 4Q 2017

It was just a year ago where there were numerous industry articles asking if cord cutting was real. There were many who thought that cord cutting would fizzle out and would not be a big deal for the cable industry. But the numbers are not from Leichtman Research Group for the end of 2017 and it shows that cord cutting is now quite real. The following numbers compare the fourth quarters of 2017 and 2016.

4Q 2017 4Q 2016 Change
Comcast 22,357,000 22,508,000 (151,000) -0.7%
DirecTV 20,458,000 21,012,000 (554,000) -2.6%
Charter 16,997,000 17,236,000 (239,000) -1.4%
Dish 11,030,000 12,025,000 (995,000) -8.3%
AT&T 3,657,000 4,281,000 (624,000) -14.6%
Cox 4,200,000 4,290,000 (90,000) -2.1%
Verizon 4,619,000 4,694,000 (75,000) -1.6%
Altice 3,405,500 3,534,500 (129,000) -3.6%
Frontier 961,000 1,145,000 (184,000) -16.1%
Mediacom 821,000 835,000 (14,000) -1.7%
Cable ONE 283,001 320,246 (37,245) -11.6%
 Total 88,788,501 91,880,746 (3,092,245) -3.4%

These companies represent roughly 95% of the entire cable market, so these numbers tell the story of the whole market. From what I can see from many of my clients, many small cable companies are likely doing even worse than the big companies.

What’s probably the most significant from these numbers to me is that the overall industry cable penetration dropped to 70% by the end of 2017, down from a high of a few years ago of 75%. There were 126.2 million households at the end of 2017, per statistica, and only 70% of them are buying traditional cable – and that number has certainly dropped more into 2018.

The rate of growth of cord cutting is increasing. In 2016 the industry lost just over 1 million customers and in one year that grew to over 3 million.

It’s not hard to see where these customer went. FierceCable reported recently that 5% (over 6 million) of US households subscribe to a vMVPD service – these are online services that carry smaller bundles of traditional cable channels like Sling TV, Playstation Vue and DirecTV Now. It’s easy to forget that just a year ago most of these services were just getting started.

It’s worth noting that AT&T overall saw only a minor drop in total cable subscribers. While AT&T and their DirecTV subsidiary lost 1.2 million customers, DirecTV now has just over 1.1 million customers. But this still has to be hurting the company since analysts all believe that the margins on the vMVPD services are much slimmer than traditional cable.

Of other note are the large percentage losses of cable customers at Dish, Frontier and Cable One.

Another way to consider these losses is on a daily basis, and the industry lost nearly 8,500 customers per calendar day during the year.

It’s obvious in looking at these number that the cable industry is now in the same kind of free fall we saw a decade ago with landline telephones. The phenomenon is widespread and 3 million cord cutters means this is every neighborhood in the country. I believe that the pace of cord cutting will continue to accelerate. It’s looked around my own neighborhood and I can’t find anybody who hasn’t either cut the cord or is thinking about doing so.

What surprises me the most is that the big cable companies are not in screaming to the Congress and the FCC to change the rules governing traditional cable. Those rules force the big channel line-ups, and the cord cutting shows that people can be happy with far less than what the programmers are selling. The cable company could be offering more of the skinny bundles offered by the vMVPDs and could retain more bundled customers.