Big ISPs and Elections

Before you stop reading, this blog isn’t about party politics – the elections I am talking about are those where citizens vote on building a fiber optic network in their community. The incumbents don’t seem able to pass up the chance to turn an election their way when competition is put onto the ballot.

The latest example of this is the upcoming election on November 7 in Ft. Collins, Colorado. Voters in that community will be voting on whether to amend the city charter to allow the city to build and operate a fiber optic network in the city. Colorado law makes this elections mandatory, but I’ve seen other cities hold voluntary elections on the issue so that they are certain that the citizens are behind their efforts to build fiber. A positive vote in Ft. Collins would allow the city to take the next step to investigate if they want to build a fiber network in the city.

Ft. Collins is a community of 59,000 homes and Comcast and the other incumbent ISPs have spent over $200,000 so far in advertising against the ballot measure – a phenomenal amount of money spent on a local election and the most ever seen in Ft. Collins.

As is usual for fiber ballot initiatives, the incumbents are fighting against the passage of the measure by spreading lies and misinformation. For example, in Ft. Collins they are saying that voting for the measure would preclude the city from making other infrastructure upgrades for things like roads. In fact, this ballot measure just gives the city the legal authority to explore fiber and it’s likely that they would have another election to approve a bond measure if they decide to float a bond for fiber – a decision that would be some time in the future.

The misinformation being floated in Ft. Collins is tame compared to some of the other ways that incumbents have tried to stop fiber initiatives. In Lafayette Louisiana the combination of Cox and BellSouth (now AT&T) were extremely aggressive in trying to stop the fiber initiative (including filing several lawsuits to stop the effort). But prior to the election when fiber was going to be on the ballot they called every home in the community with a push poll that asked ludicrous questions about the fiber project. An alert citizen recorded the push poll and it can be found here. This takes 30 minutes to hear the whole thing, but if you are interested in the tactics the big ISPs use to fight it, this is well worth a listen. There are some amazing questions in this poll, and the gall of this push poll might have been what pushed the election to pre-fiber. In Louisiana the city needed to get more than a 65% yes on the fiber initiative, and due to a strong community effort the ballot measure passed easily.

I also remember a similar election in North St. Paul, Minnesota, a small community surrounded by the city of St. Paul. When the city put a fiber initiative on the ballot Comcast sent busloads of people to the city who went door-to-door to talk people out of voting for fiber. They deployed the usual misinformation campaign and scared a community that had a lot of elderly citizens into voting against the fiber initiative, which narrowly lost at the polls.

There was a similar lection recently in Longmont, Colorado. When the city first held a vote on the same ballot measure as Ft. Collins, the money from the big ISPs defeated the ballot measure. The ISPs won using a misinformation campaign that talked about how the fiber effort would raise taxes. But the citizens there really wanted fiber, and so they asked for a second vote and in the second election there was a massive grass-roots effort to inform the community about the facts. The fiber initiative on the second ballot won resoundingly and the city now has its fiber network.

There are several lessons to be learned from these ballot battles. First, the incumbents are willing to make a sizable investment to stop competition. But what they are spending, like the $200,000 in Ft. Collins, is a drop in the bucket compared to what they stand to lose. Second, they always attack fiber initiatives with misinformation, such as scaring people about higher taxes. They don’t fight by telling what a good job they are doing with broadband And finally, we’ve seen the ISP efforts be successful unless there is a strong grass-roots effort to battle against their lies. Cities are not allowed by law to take sides in ballot initiatives during an election cycle and must sit quietly on the sidelines. And so it’s up to citizens to take on the incumbents if they want fiber. The big ISPs will always outspend the pro-fiber side, but we’ve seen organized grass-roots efforts beat the big money almost every time.

Big ISPs Want to be Regulated

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

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

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

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

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

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

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

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

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

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

Finally, Speed Competition

cheetah-993774We are at the beginning of a big change in urban Internet speeds. Recently, there have been all sorts of announcements about companies upgrading speeds or wanting to build fiber in major markets.

For instance, Comcast says that they are going to upgrade all of their systems to DOCSIS 3.1 within about two years. This new CableLabs standard is going to allow them to offer far faster speeds to their customers. DOCSIS 3.1 allows a cable system to bond together empty channels to make one large data pipe and theoretically, if the networks were empty of television channels, they could offer download speeds up to 10 Gbps. But since there are still lots of cable channels on these network the more realistic maximum speeds for now will be a gigabit or maybe less depending upon the spare channels available in any given system.

Comcast has already started the process of upgrading customer speeds. For example, in much of the northeast they have upgraded customers from 25 Mbps to 75 Mbps and from 105 Mbps to 150 Mbps. They’ve announced that these same upgrades will be done in all of their systems. They’ve said in future years there will be more upgrades to go even faster.

Other cable companies are likely to follow suit. MediaCom has already made gigabit announcements. Time Warner in Austin also greatly increased speeds. Cox has announced aggressive plans for speeds. It’s likely almost all urban cable systems will be upgraded to DOCSIS 3.1 within a few years.

Meanwhile, CenturyLink has been starting the process of building fiber in most of their larger markets. It looks like they are building fiber in cities like Seattle, Portland, Minneapolis, Phoenix, Denver, Salt Lake City, and a number of other markets. They will offer speeds that vary from 40 Mbps for $30 to gigabit speeds for $80 as part of bundled packages. CenturyLink is also experimenting right now in Salt Lake City with G.Fast, testing a 100 Mbps product over copper. Between the two products the company thinks they will be able to offer faster speeds to a lot of urban and suburban customers.

And of course, Google has been rolling out fiber and can be credited with popularizing the concept of gigabit fiber. They have built or are launching in Kansas City, Austin, Atlanta, Provo, Salt Lake City, Nashville, Raleigh-Durham and now San Antonio. They have released a long list of other cities where they may go next.

Finally, there are numerous smaller companies and municipalities that are already building fiber or who have plans to build fiber.

Comcast’s new philosophy is a 180 degree turnabout from a few years ago when they said that customers didn’t need bandwidth and that they would give customers only what Comcast thought they needed. It seems now that Comcast is adopting the philosophy of unilaterally increasing speeds, even in markets where they might not have an immediate competitor on the horizon. They already have the customers and they already have the networks and they can take the wind out of the sales of a potential fiber competitor if customers in any given markets already have fast speeds at an affordable price.

I think Comcast and the other companies are smart to do this. The higher-priced data products are probably the highest margin products we have ever had in this industry. It doesn’t cost a whole lot more than a few dollars to buy the raw bandwidth needed to serve a data customer and it’s widely believed that for large companies the margins are in the 80% to 90% range. It’s a wise decision to protect these customers, and by being proactive with speeds the cable companies will make it a lot harder for other companies to take their customers. And I think they have finally begun to learn the little secret that many have already figured out – faster speeds don’t really hurt profitability and a customers with a 100 Mbps connection doesn’t use much more data than one with a 20 Mbps connection, they just download things faster.

So what we are seeing now is competition through speed rather than competition through pricing. All of the comparisons I have ever seen show that US broadband prices are significantly higher than in any other developed countries. When Google or CenturyLink enters a market with $70 to $80 gigabit they are not lowering prices, and are actually luring customers to pay more than today. It’s an interesting market when even in the most competitive markets the prices don’t really come down.

Why Not Faster Data Speeds?

Speed_Street_SignI was recently at my mother-in-law’s house and saw an example of what competition can do for the country. She lives in Kyle, Texas, which is an outer suburb of Austin. When I say outer, it’s an hour’s drive to downtown Austin.

As I was working on my laptop using her WiFi, it felt like it was faster than in previous times that I had visited here, so I ran a speed test. And sure enough, her bandwidth measured in at a little over 70 Mbps download and 10 Mbps upload.

She buys only the basic Internet product from Time Warner. I am pretty sure that in the past this was a much slower product, closer to 15 Mbps, and possibly less. But for certain her speed has been increased significantly due to competition. By now everybody knows that Austin is in the midst of significant competition with Google, Grande and AT&T each selling a gigabit data product, while Time Warner which now has speeds up to 300 Mpbs. What this competition has done is to up the game for everybody in the market.

The sad thing is that it takes competition to get the cable companies to up their game. I doubt that many other Time Warner markets around the country have base speeds of 70 Mbps, and probably none of their other markets has speeds of 300 Mbps.

I really don’t understand why the cable companies don’t just increase speeds everywhere as a way to fend off competition. One would think Google might be a lot less likely to build fiber into a market if every customer there already had 300 Mbps data speeds. The cable companies in most markets clearly have the majority of customers, and certainly have all of the customers who are interested in fast speeds. They have it within their power to be market leaders and to bring fast speeds today, so that any future competitor will have a hard time denting their lucrative markets.

Instead many of them sit and wait until the inevitable announcement of competition before they do the upgrades needed to get faster speeds. For example, Cox has announced that in Omaha and Las Vegas they will have speeds as high as a gigabit in response to fiber deployment by CenturyLink in those markets. But not all of them are waiting. For example, Charter recently doubled the speeds on most of their products. That is not the same as offering blazingly fast speeds, but it really makes a difference to boost their base residential product to 60 mbps.

I know that there is a cost to upgrading data speeds. But recently Time Warner Cable said in their annual report that they have a 97% margin on their data products, a number that opened a lot of eyes nationally. One would think that the cable companies would do anything to protect a product with margins that high and that they might spend some of that margin to fend off competition.

I have no idea how well Google does when they come into a new market. I know that when a municipal provider comes to a market they generally get 40% to 60% market penetration with their data products. But the Google product, at a premium price of $70 per month is probably not going to attract quite as many customers. Still, one has to think that they probably get at least 30% of households.

Cable companies have a lot to lose if they lose 30% or more of their customers in the large urban markets. It’s clear that the cable TV product today has very poor margins (if not negative margins) and so the future of the cable companies comes from data sales. They are in the enviable position of already having gotten most of the customers in most market and one would think they would want to jump in front of potential competition and head it off before it even starts.

But they are not acting like companies with a lot to lose. To me it feels like they are making a strategic error by not being more proactive with data speed upgrades. The cable companies are largely disliked by their customers, and they could go a long way to change that perception by unilaterally raising data speeds to be as fast as they can make them.

I am glad to see competition forcing data speed increases, but the majority of markets are not competitive. But in my mind, if the cable companies wait to increase speeds only after there has been an announcement of a coming competitor in each market, they will have lost the game. People are going to perceive that as too little, too late. And it’s a shame, because we know in Austin what a cable company can do if they are motivated by competition. I just scratch my head and wonder why maintaining markets with a 97% margin data product is not enough motivation to fight to keep the customers they already have.

 

Cable Banking on WiFI

Wi-FiI’ve been reading a lot lately about the massive effort that cable companies are putting into expanding their WiFi networks. It’s estimated that Comcast and Cablevision together now have almost 9 million public hotspots, most of which come from dual routers in subscribers homes that provide a hotspot link along with the subscriber’s link. There are about another 1.5 million hotspots deployed by Cox, Time Warner and Bright House.

At this point nobody is quite sure how the cable companies are going to monetize this business. Several years ago some standards were developed by the Wi-Fi Alliance to create interoperability between WiFi networks and cellular networks. The idea was to allow cellular companies to offload overflow cellular traffic onto commercial WiFi networks when their cell sites get too busy.

But there are still changes needed in the industry for this to take place. First, a lot more phones need to be enabled to make calls on WiFi, a feature that is now included on the IPhone, but which few people have enabled. Probably the most important thing still lacking is the brains in the networks that will allow easy WiFi roaming so that a call or data transmission can be handed from one WiFi hotspot to another without needing a new verification and login and without restarting a given transmission. Until WiFi roams smoothly you won’t be able to continue a WiFi voice call without being cut off every time you change to a new hotspot. This might not be solved until the whole cellular network moves into the cloud using software defined networking so that the brains that are behind the handoffs of cellular calls can be applied to other types of connections.

But in high traffic areas where there is a lot of foot traffic, WiFi certainly can relieve the data traffic on cellular networks. But are the cellular companies really willing to pay for this? Already today WiFi is carrying a lot of data for cellular-enabled devices for free (to the cellular companies). Adobe published statistics recently that show that 93% of data on tablets and 43% of data on smartphones is carried by WiFi. But one would have to think that the vast majority of this is done in people’s homes and offices where they spend most of their time.

There is no doubt that having somebody else carry their data traffic is a benefit to cellular companies, but that doesn’t mean that they are going to be willing to write checks to WiFi hotspot owners for carrying cellular data. There has been no news of Comcast or the other cable companies making such deals with cellular companies, and so one would think this application is mostly speculation.

One also has to wonder about the efficacy of the current cable hotspots. The majority of Comcast hotspots are going to come from home routers that have been equipped to provide a public WiFi connection as well as the in-home connection for customers. But how useful are these connections? If you’ve ever walked around outside your house looking to connect to your own WiFi network I think you understand that reception outside of your home is sketchy. There are places where the signal is clear, areas where it is poor and areas where it doesn’t exist.

I look at my own house and wonder how valuable it is for Comcast to enable my hotspot. I get joggers and dog walkers by here on the front sidewalk, but otherwise this is not a neighborhood with much foot traffic. The only circumstances where my WiFi might have value is if workmen at my house use it, or if one of my immediate neighbors obtains a Comcast password from somebody and uses my WiFi for free. Otherwise, somebody would need to sit on my front porch or park in my driveway to get WiFi, something I would frown greatly upon.

There are a few ways that Comcast can monetize WiFi. One is to sell roaming WiFi as a service, much like you get in an airport. But to sell that service requires large areas of good coverage. And there are places like that. For example, it’s been reported that Comcast has blanketed the Jersey shore with coverage, and so selling a data connection to non-Comcast customers in these kinds of areas is a possibility.

I think the best business opportunity is for Comcast to get into the cellular business using WiFi enabled phones. They could sell cellular plans that either use only WiFi, or that use WiFi first and use cellular as the back-up. A lot of people mostly use their cellphones in homes and offices and such callers could save a lot of money if Comcast prices it right. Assuming that they could strike a deal with one of the four major spectrum holders they ought to be able to undercut the major carrier’s prices and still be profitable with such products.

But nobody knows for sure why Comcast and the other cable companies are doing this because they haven’t said. They must have something in mind, because they are spending a lot of money on public hotspots. One would certainly hope that Comcast has something in mind since they are antagonizing their cable modem customers yet again by turning them into public hotspots without their permission.