A Bad Year for the Cable Industry

The traditional cable TV industry had a miserable 2019. Collectively the biggest cable TV providers lost over 5.9 million subscribers during the year, almost 7% of the total customer base. The impacts of COVID-19, along with the already existing trends in the industry spell bad news for the industry in 2020.

I expect that customer losses will accelerate over 2019 levels. The majority of subscribers leaving traditional cable cite cost as the primary reason, and as millions of people lose their jobs, one of the first things they are going to do is to ditch traditional cable for something less expensive. For years, nationwide surveys of subscriber sentiment have shown that as many as 20% of households each year contemplate dropping traditional cable TV, but for a variety of reasons many households don’t get around to doing so. This year a lot of these homes are finally going to make the change.

The industry has also lost its largest advertising draw in sports. MoffettNathanson predicted that just losing the spring and early summer sports could cost the industry as much as $26 billion in advertising. If COVID-19 carries forward through baseball and into football season those numbers will climb much higher. The MoffettNathanson numbers also didn’t include the impact on Comcast of delaying the Olympics for a year, which are a significant piece of corporate earnings. The impact of sports advertising will be uneven throughout the industry because of contractual relationships. Many contracts require networks to continue to pay for sports rights to the various sports leagues even if the games aren’t played, but contracts also require the leagues to compensate networks for lost advertising revenue. That’s going to mean a lot of lawsuits, but the bottom line is that sports leagues and cable networks will both lose a lot of revenue.

Advertising is taking additional hits. Travel-based advertising has already disappeared. It’s also now obvious that a lot of local advertising is drying up as small businesses feel the pinch from this crisis, affecting both local TV stations and newspapers. A number of small newspapers around the country have already folded, and local television and radio stations are likely to follow.

Another big hit for the industry will come as the production of new content has slowed to a crawl. Movie and television studios have put the production of new content on hold. How long will homes remain happy crawling through the old content on Netflix, Amazon Prime, Hulu, etc?

Sports networks are in big trouble since they have no live content to share. Watching ESPN right now is downright sad for a sports fan. Sports fans might watch old playoff games on ESPN, FS1 and other networks for a few weeks, but that’s going to get quickly lose its appeal.

The programmers have already baked future rate increases into their future contracts with cable providers. With sports programming and new content both dwindling, I expect a lot of small telcos and cable companies will decide that this is a good time to ditch the cable product entirely. Half of my clients that offer cable TV have already been having internal discussions about if and when to walk away from cable – this year might provide the impetus to do so.

If there is any silver lining for the industry, it’s that this is an election year and there promises to be a lot of political advertising between now and November – at least in states with close races for President or with a heavily contested Senate race.

The cable industry was already under stress and this year ought to push it closer to the brink where the traditional cable model breaks. The industry isn’t to that brink yet and over 60% of homes are still subscribing to traditional cable TV. But as that number drops, many of the industry paradigms are going to break and the industry will either have to reinvent itself or undergo the slow death that we saw with residential landlines.

An End to Data Caps?

All of the major ISPs that were enforcing data caps have lifted those caps in response to the COVID-19 crisis. This includes AT&T, Comcast, Cox, Mediacom, and CenturyLink. All of these companies justified data caps as a network management tool that was in place to discourage overuse of the network. That argument no longer holds water if these ISPs eliminate the during a crisis that is overtaxing networks more than we are likely to ever see again.

These companies eliminated the caps as a result of political pressure and from a mass public outcry. The caps were eliminated to make broadband more affordable in a time when millions of people are becoming unemployed. By eliminating the caps during this crisis, these ISPs have publicly admitted that the caps were about making money and not for any issues related to network traffic.

The lame justification these ISPs gave for data caps was always weak when other large ISPs like Charter, Verizon, Altice, Frontier, and Windstream never implemented data caps. A few ISPs on that list like Frontier and Windstream have some of the weakest networks in the country yet never sought to implement data caps as a traffic control measure.

AT&T has been the king of data caps. They have data caps that kick in as low as 150 gigabytes of monthly broadband usage on DSL lines. AT&T’s fixed wireless product for rural markets has a data cap that kicks in at 250 GB. Interestingly, customers buying the 300 Mbps on fiber have a 1 terabyte data cap while customers buying gigabit broadband on fiber are allowed unlimited usage. This also proves that the data caps aren’t about traffic control – the caps are removed from the largest data users. The AT&T caps are to encourage somebody buying 300 Mbps to upgrade to the faster service. AT&T is also the king of overage charges. For DSL and fixed wireless, the overage charges are $10 for each 50 GB, with a maximum monthly overage of a whopping $200. The monthly dollar cap on 300 Mbps service is $100.

Mediacom had the next lowest data caps at 400 Mbps. Comcast and Cox have had data caps at 1 TB. It’s been reported by customers that the companies aggressively enforce the caps. CenturyLink has mostly not billed the data caps, but the fact that they eliminated the caps during this crisis likely means they were billing it to some customers.

To put these data caps in context, OpenVault says that at the end of 2019 that the average households used 344 gigabytes of data, up from 275 gigabytes a year earlier. More germane to data caps, OpenVault says that nearly 1% of homes now use 2 terabytes per of data month and 7.7% use over 1 terabyte per month. The percentage of homes using over 1 terabyte climbed from 4% a year earlier. AT&T has likely been cleaning up with data caps charges while Comcast was just starting to see some real revenue from the caps.

What remains to be seen is if these ISPs reintroduce data caps sometime later this year. They can no longer make a straight-faced claim that data caps are in place to dissuade overuse of the network. If data caps had that kind of impact on networks, then during the crisis the ISPs should have tightened the data cap threshold to protect the many new households that are working from home or doing schoolwork remotely. The data caps have always been about money, nothing else.

Unfortunately, we have no recourse other than a loud public outcry if these ISPs renew the data caps. The FCC has completely washed its hands of broadband regulation and killed its authority to do anything about data caps. Most tellingly, when FCC Chairman Ajit Pai released a plea to ISPs to “Keep Americans Connected”, that plea didn’t even mention data caps. Chairman Pai asked ISPs not to disconnect customers for not paying and asked ISPs to provide more public hotspots.

I bet that when this crisis is over that the big ISPs will quietly introduce data caps again. Even before this crisis, almost 9% of homes routinely used more than a terabyte of data, and the data caps are a huge moneymaker for the big ISPs that they are not willingly going to give up. During this crisis, a lot of routine functions are going go virtual and I expect a lot of them will stay virtual when the crisis is over. It wouldn’t be surprising a year from now to see 20% of homes routinely exceeding a terabyte of usage each month.

I think these ISPs will be making a huge mistake if they introduce data caps a few months, or even a year from now. Millions of people found themselves unable to work or school from home due to poor broadband. In the current environment a big public outcry against bad ISP behavior has a high chance of bringing Congressional action. Almost nobody, except the most partisan politicians would vote against a bill that bans data caps. The ISPs should be afraid of other restrictions that might come along with such a bill.

Expect a New Busy Hour

One of the many consequences of the coronavirus is that networks are going to see a shift in busy hour traffic. Busy hour traffic is just what is sounds like – it’s the time of the day when a network is busiest, and network engineers design networks to accommodate the expected peak amount of bandwidth usage.

Verizon reported on March 18 that in the week since people started moving to work from home that they’ve seen a 20% overall increase in broadband traffic. Verizon says that gaming traffic is up 75% as those stuck at home are turning to gaming for entertainment. They also report that VPN (virtual private network) traffic is up 34%. A lot of connections between homes and corporate and school WANs are using a VPN.

These are the kind of increases that can scare network engineers, because Verizon just saw a typical year’s growth in traffic happen in a week. Unfortunately, the announced Verizon traffic increases aren’t even the whole story since we’re just at the beginning of the response to the coronavirus. There are still companies figuring out how to give secure access to company servers and the work-from-home traffic is bound to grow in the next few weeks. I think we’ll see a big jump in video conference traffic on platforms like Zoom as more meeting move online as an alternative to live meetings.

For most of my clients, the busy hour has been in the evening when many homes watch video or play online games. The new paradigm has to be scaring network engineers. There is now likely going to be a lot of online video watching and gaming during the daytime in addition to the evening. The added traffic for those working from home is probably the most worrisome traffic since a VPN connection to a corporate WAN will tie up a dedicated path through the Internet backbone – bandwidth that isn’t shared with others. We’ve never worried about VPN traffic when it was a small percentage of total traffic – but it could become one of the biggest continual daytime uses of bandwidth. All of the work that used to occur between employees and the corporate server inside of the business is now going to traverse the Internet.

I’m sure network engineers everywhere are keeping an eye on the changing traffic, particularly to the amount of broadband used during the busy hour. There are a few ways that the busy hour impacts an ISP. First, they must buy enough bandwidth to the Internet to accommodate everybody. It’s typical to buy at least 15% to 20% more bandwidth than is expected for the busy hour. If the size of the busy hour shoots higher, network engineers are going to have to quickly buy a larger pipe to the Internet, or else customer performance will suffer.

Network engineers also keep a close eye on their network utilization. For example, most networks operate with some rule of thumb, such as it’s time to upgrade electronics when any part of the network hits some pre-determined threshold like 85% utilization. These rules of thumb have been developed over the years as warning signs to provide time to make upgrades.

The explosion of traffic due to the coronavirus, might shoot many networks past these warning signs and networks start experiencing chokepoints that weren’t anticipated just a few weeks earlier. Most networks have numerous possible chokepoints – and each is monitored. For example, there is usually a chokepoint going into neighborhoods. There are often chokepoints on fiber rings. There might be chokepoints on switch and router capacity at the network hub. There can be the chokepoint on the data pipe going to the world. If any one part of the network gets overly busy, then network performance can degrade quickly.

What is scariest for network engineers is that traffic from the reaction to the coronavirus is being layered on top of networks that already have been experiencing steady growth. Most of my clients have been seeing year-over-year traffic volumes increases of 20% to 30%. If Verizon’s experience in indicative of what we’ll all see, then networks will see a year’s typical growth happen in just weeks. We’ve never experienced anything like this, and I’m guessing there aren’t a lot of network engineers who are sleeping well this week.

A Message to DC – A Quick Fix for the Broadband Gap

Millions of people without broadband are being sent home to work. Even more millions of households without broadband have kids coming home to finish out the school year. It’s not realistic to expect many of these folks to shelter in place to wait out the coronavirus emergency if they don’t have broadband at home. These folks are going to go out every day to find broadband.

There is one way that the federal government can quickly provide broadband to those without it. The government should buy piles of portable WiFi hotspots that work on cellular networks and distribute them to homes that need the broadband to function.

Distributing hotspots is only half of the needed solution. The cellular carriers will want to be compensated for all of the broadband usage on the cellular networks, and the federal government should just write a lump sum checks to Verizon, AT&T, T-Mobile, and the smaller cellular carriers so that people using these hotspots can get the broadband for free during the crisis. We can’t let the carriers bill this as if it is normal cellular data or everybody working at home would get a bill for $500 per month. One interesting idea is for the cellular carriers to connect these hotspots to the newly released spectrum band they’re touting as 5G – they could then claim that 5G saved the day!

The federal government should also distribute funding now to beef up cellular networks. The FCC was already planning to distribute $9 billion later this year using the newly created 5G Fund which is aimed at improving rural 4G. Let’s fund this now out of coronavirus funding and ask the carriers for an accelerated plan to improve cellular data coverage now.

The final challenge is getting the WiFi hotspots into the right hands. This could be done through employers asking for hotspots for employees and for school systems asking for hotspots for students. Those two groups could do the heavy lifting of identifying the homes that have the most immediate need for a broadband solution.

Most urban ISPs have announced plans to make it easier on folks without broadband, but none of those plans helps the millions of rural homes without broadband today. As a country, there may be no better use of federal money than to enable millions of homes to comply with stay-at-home directives while remaining productive. Every employee we can keep working is one less person that is going to need other assistance due to the crisis. Everybody benefits if we can keep students on track to finish the school year.

I’ve heard giant numbers like a trillion dollars, being thrown around that will be needed to keep the economy afloat. What I’m suggesting would cost only a tiny percentage of that. It’s also an idea that will create a greater dollar benefit than the cost of the program. Keeping folks working and paying taxes might be the best possible use of federal funding during this emergency.

We could skip the hotspots and instead subsidize data plans on cellphones. However, using a hotspot makes it easier to create one connection per household. We also don’t want the hotspots to roam, and activating data on cellphones would likely invite people to leave the home.

We also need a fast solution. People need broadband to work at home now, not 3 months or 6 months from now. We don’t want to create a lot of red tape for this and we don’t run this funding through existing programs like SBA or E-Rate, because doing so means nobody gets a hotspot this year. This is a national emergency and we need to treat it as such.

When this crisis is over we hopefully will finally have the discussion about providing more funding for building rural broadband infrastructure – but those are multi-year plans and don’t help with the immediate problem. We need a solution for those without broadband or we’re going to pay a big price for inaction. Getting a mobile hotspot to somebody trying to work in a home provides a solution immediately.

If the federal government doesn’t tackle this, states might want to consider it. Nobody understands more than local politicians the societal benefit of keeping people working. We can either spend a few hundred dollars per home to get broadband or we can spend thousands for the same homes if people can’t work and are unemployed – the math is simple.

New Emphasis on Working from Home

One of the hottest topics in the news related to coronavirus is working from home. Companies of all sizes are telling employees to work from home as a way to help curb the spread of the virus. Companies without work-at-home policies are scrambling to define how to make this work to minimize disruption to their business.

Allowing employees to work at home is not a new phenomenon. Most large corporations have some portion of the workforce working at home at least part-time. Studies have shown that home-based employees are often more productive than those working in the office. Those working at home enjoy big savings, both in dollars and time, from not commuting to an office.

There are a few communities around the country that have offered incentives to attract employees who work from home. The first such program I heard of was in 2018 where Vermont offered a cash incentive of between $5,000 and $10,000 for families with a home-worker to relocated to the state. The state has an aging population and wanted to attract families with good incomes to help energize the local economy. The state recognized that the long-term local benefits to the state from attracting high-paying jobs is worth a lot more than the cash incentive they are offering.

Since then other communities have tried the same thing. I recently read about a similar effort in Tulsa, Oklahoma, which has been watching its population drop since 2016. In Tulsa, a foundation is fronting the $10,000 payments used to attract home workers to the community. There is a similar program in Topeka, Kansas and in northwest Alabama.

I’ve been working from home for twenty years, and during that time I’ve seen a big shift in the work-from-home movement. When I first worked from home, I didn’t know anybody else who was doing so. Over time that has changed and in my current neighborhood over a third of the homes on my block include at least one adult working from home. According to Bloomberg, about 4% of the full-time workforce, not counting self-employed people, now work from home. Adding in self-employed people means that work-from-home is a major segment of the economy.

Wall Street seems to have recognized the value of working at home. As I write this article the Dow Jones average has dropped over 11% since February 14th. During that same time, the stock price of Zoom, a company that facilitates remote meetings has climbed over 27%.

I’m sure that most of the people being sent home to work are going to eventually return to the office. However, this current crisis is likely to make many companies reexamine their work-from-home philosophy and policies. Companies that allow people to work from home, at least part-time, are going to be the least disrupted by future economic upheavals.

If you read my blog regulatory you knew what’s coming next. The one group of people who can’t work from home are those who can’t get a decent home broadband connection. Huge numbers of rural homes in the country still have no broadband option or can only buy broadband that is not sufficient for working from home. Most corporations test the home broadband connection before letting employees work from home, and homes can be disqualified due to poor download speed, poor upload speed, or poor latency. A home broadband connection that meets the FCC definition of broadband at 25/3 Mbps might still be deemed by a corporation to be inadequate for working from home.

My consulting firm CCG talked to a homeowner this week who moved to a rural area looking for an improved lifestyle. The wife works from home, and before they bought the new home they were assured that the broadband there was fast enough to support work at home. It turns out the home is served by a WISP that is delivering less than the advertised speed, and that working from home is impossible in the new home. This family is now facing a crisis caused by lack of good broadband – and there may be no solution for their problem.

Sadly, a whole lot of America is losing economically by not being able to attract and support good-paying jobs from those working at home. If a city like Tulsa is willing to pay $10,000 to attract one work-from-home employee, imagine the negative impact on rural counties where nobody can work from home.

The Fragile Supply Chain

The recent outbreak of the coronavirus reminded us how fragile the supply chain is for telecom. As it turns out, the Hubei province of China is where much of the world’s optics and lasers are built that are the key component in every device that is used to communicate in a fiber network. Within days after the reality of the virus become apparent, the stocks of tech companies that rely on lasers took a hit.

The supply chain for electronics manufacturing stretches worldwide. The lasers are made in one place. The chips in devices are made somewhere else. Other electronic components come from a third geographic source. Components like cellphone screens and other non-electric components come from yet a different place. And the raw materials to make all of these devices come from markets all over the world.

The virus scare made the world wake up to the fragility of the supply chain. Without lasers, there would be no fiber-to-the-home devices manufactured. There would be no new servers in data centers. There would be no new small cell sites built or activated. Major industries could be brought to their knees within weeks.

It’s not hard to understand why I say the supply chain is fragile. Consider smartphones. There are probably a dozen components in a smartphone that must be delivered on time to a smartphone factory to keep the manufacturing process going. If any one of those components can’t be delivered, smartphone manufacturing comes to a halt. The manufacturing floor can be crippled by a lack of screens just as much as it can suffer if the chips, antennas, or other key electronic components become unavailable.

It’s impossible to know if the coronavirus will cause any major disruption in the supply chain for fiber optics – but the point is that it could. If it’s not a virus today, disruptions could come from a wide range of natural disasters and manmade problems. I remember a fire that destroyed a fiber optic cable factory a few decades ago that created a major shortfall of optic cables for a year. Floods, fires, earthquakes, and other disasters can knock out key manufacturing sites.

Manmade disruptions to the supply chain are even easier to imagine. We saw the price of electronics components shoot up over the last year due to tariff battles between the US and China. The supply chain can be quickly cut if the country making devices goes to war, or even undergoes an ugly regime change. It’s also now possible to weaponize the supply chain and threaten to cut off key components when negotiating other issues.

I’m sure that very few Americans realized that the Wuhan region has a near-monopoly on the manufacture of lasers. A worldwide economy rewards the creation of monopolies because components are cheapest when an industry takes the most advantage of the economy of scale. The companies in the Wuhan region can likely manufacture lasers cheaper than anybody else.

From a strategic position, countries like the US should foster their own industries to manufacture vital components. But that’s not easy or practical to achieve. A new US company trying to compete on the world stage by making lasers is likely to be more expensive and unable to compete when the supply chain is humming at normal capacity. It’s hard to picture creating a competitor to the Wuhan region that can manufacture lasers in the quantities, and at a price the market is willing to pay.

In the long run, the world always finds alternate solutions to any permanent changes in the supply chain. For example, if China is ever unable to export lasers, within a few years other countries would pick up the slack. But the fiber industry would be devastated during the lull needed to find a new source of components. Bank of America reported last year that 3,000 major manufacturing companies were already reconsidering their supply chain due to tariff and other concerns. Some of these companies, particularly electronics companies have been considering bringing production back to the US now that factories can be heavily robotized. I’m sure the coronavirus has accelerated these decisions.