The Competition Dilemma

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

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

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

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

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

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

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

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

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

Are Customers Taking Charge of Telecom?

MD crowdThere has always been some uncertainty in the telecom industry and over my career I have seen some giant companies come and go from the scene. But as I watch the big companies today I am seeing more unease about the future than I can ever remember.

This unease is justified. And I think that perhaps this is due largely to the cumulative effect of the choices customers are making. In the past the large telcos and cable companies had a limited portfolio of products that they offered, with assurances that a significant portion of their potential customer base would buy them.

But in today’s world, customer choice is expanding rapidly. People have a huge number of options compared to the past, and as customers pick what they like we see winners and losers in the industry. This has to scare the big companies to death.

This happens at both the macro and the micro level. Let me start with the micro and look at programming choices. Recent Nielsen surveys show that the time spent watching traditional television programming, particularly on a real-time basis, is starting to decrease significantly. But the time spent by people watching some kind of content is increasing.

I’m not sure that older people understand how fundamentally differently our kids watch content than the way that we do. As an example, my daughter watches a lot of YouTube, in particular videos on how to make crafts. She has an artistic bent and she now finds content that pleases her rather than watching what some media company thinks that kids ought to watch. Basically, every kid is creating their own channel of content, and most of it is free.

As kids make these choices, and as that generation ages, traditional content is going to be in a world of hurt. For example, somebody you never heard of who goes by the name of Stampy Longnose started making Minecraft tutorials and walk-throughs and putting them on YouTube. He’s been a huge hit with kids under 10 and is now a millionaire due to his work on YouTube. We are now at a time when even 4 year olds are able to up-vote their favorite content. Certainly there will always be some content like Game of Thrones or House of Cards that grabs national attention and that gets millions of viewers. But over time a lot of the content that the various networks are putting together is going to go largely unwatched.

In this new world of micro-content, viewers find content by word-of-mouth. For instance, I have been watching a hilarious comedy on YouTube called The Katering Show that was recommended by a friend. This is a small budget ‘cooking show’ by two Australians that I have found to suit my own sense of humor (caution, it’s a bit bawdy). This is my first foray onto YouTube other than to watch music videos, but I know I will now be looking for other content there.

The same thing happens with cellphone apps. While there are a handful of apps that a whole lot of people use, over time we each go find things that please us. My favorite app is Flipboard; I get most of my news from it these days. Flipboard allows you to choose from a wide array of news sources and end up with a customized newsfeed. Every cellphone user has their own set of favorite apps. If enough people use a given app it succeeds, and if they don’t it fails.

On the macro level, there is a huge tug-of-war going on between platforms and devices. Anybody who is in those businesses has to be worried. For example, smartphones are becoming a serious competitor to PCs and tablets and even to televisions. My wife and daughter watch a surprising (to me) amount of content on their phones.

The industry still has some sway, of course, in the device market. They can make a huge marketing splash and get people interested in something new like wearables or smartwatches. But in the end, the public is going to pick the winners and losers in any new area. Countless companies have already come out with devices that they were sure would be a hit but that flopped badly.

Almost every segment of the industry is being tugged at by significant (or soon to be significant) competition. We are going to see WiFi battling it out with cellular, WebRTC battling for a big chunk of the voice business, OTT programming battling the cable companies, gigabit fiber networks challenging the incumbent ISPs.

In the hardware world we see cloud services going head to head with company routers and IT departments. Manufacturers of headends and cell sites are worried about software-defined networks that will eliminate the need for their equipment. Settop boxes are being replaced by smart TVs, Roku boxes, and game platforms.

It’s hard to find many parts of the industry that are not in turmoil in some fashion, though there are a few. Makers of fiber optic cables are working at a feverish pitch to keep up with demand. ESPN is making tons of money due to exclusive sports content. But more and more it seems that for the first time that I can remember in our industry, customers are picking the winners. That is something very new.