The Pent-up Demand for Cord Cutting

I just saw an eye-opening statistic. Deloitte’s latest Digital Media Trends Survey reports that 56% of current pay-TV subscribers are keeping TV because they feel trapped by the bundle. Deloitte concludes that there is huge pent-up demand for cord cutting.

This number is not entirely surprising to me because in the last few years I’ve seen new fiber networks get a much smaller percentage of cable customers than would be expected by the subscribership on the incumbents. New fiber providers do surveys showing incumbent cable TV rates between 65% to 75%, and yet they far lower percentages of new customers buying cable TV on their new fiber network.

I always interpreted this to mean that the new fiber competitor attract customers who want faster broadband. I’ve assumed that these were natural cord cutters. But if the Deloitte statistic is to be believed, a large percentage of new customers on fiber networks are using the opportunity of changing providers as a chance to drop the traditional cable that they no longer want.

We know that there is a financial penalty for breaking a bundle, which must be a strong incentive for people to stay with their current provider. The amount of this penalty differs by customer and often has to do with how willing a customer is to fight to keep a cheap price while dropping cable. I’ve always thought the penalty for dropping cable is between $10 and $20 per month.

But sometimes the bundle is more and is forced. I moved and left Comcast less than two years ago. They would not let me buy faster broadband speeds without subscribing to basic cable TV. I tried every year to try to drop the cable – something that I never used and for which I stashed the settop box in the closet. But I was told each year that dropping the cable meant dropping back to a slower broadband speed. In my case I would have saved at least $40 per month from dropping basic cable, but I felt blackmailed into keeping it to keep an acceptable broadband speed.

This statistic has a lot of industry implications. First, builders of new networks can’t count on a big cable penetration. Obviously the Deloitte 56% finding is going to vary from market to market – but it’s such a large number that in almost any market a new network is going to get far lower cable penetration rates than what the incumbent has today. We know nationwide that the overall cable penetration rate last year was 69%, which is now probably closer to 67%. New networks are going to see significantly lower cable penetration rates – if Deloitte is right, perhaps in the mid-30% range.

If this statistic holds true everywhere it is probably one of the main reasons why customer dislike of cable companies is growing. Cable companies have been among the lowest rated companies in terms of customer satisfaction – and in recent years their already low ratings are continuing to drop. Many consumers must feel the way that I felt about Comcast – that they are being ripped-off and held captive by the bundled pricing. The same bundle that they liked when it first saved money is being used against them if they want to drop cable TV.

This statistic also makes new technologies and new ISPs more attractive. People will likely flock to 5G if the speeds are decent and they aren’t forced to take cable TV. This might also be one of the reasons that many are choosing cellular broadband – to get away from over-expensive cable TV.

Finally, this means that the cable companies are sitting on an albatross of a product. There are many millions of homes paying for a product that they no longer want. Last year there were still more homes that dropped telephone landlines than cut the cable cord. But if the Deloitte statistic holds true, it might not take much for many homes to make the cord cutting decision and cord cutting could quickly change to a deluge. The industry-wide implications of that are huge – it would quickly cripple programmers. It would put a huge dent in the retransmission fees that are currently fueling the profits of the major over-the-air networks. A huge drop in traditional cable customers would quickly be felt in the sports world – which is largely financed with TV revenues. It means a drastic drop in the incentive to advertise on TV – the other major revenue that fuels the industry.

I believe that the cable companies have been counting on cord cutting to increase slowly over time, similar to the way that the landline telephone business has slowly ebbed away. But if there is this much pent-up demand to drop cable, it’s not inconceivable that the number of cable customers could drop explosively if there is a consensus that it’s worth it to break the bundle. The whole cable industry is not ready for an explosive drop in customers and it would get ugly quickly.

The Cost of Building 5G

It seems like I can barely browse industry articles these days without seeing another prediction of the cost of providing fast broadband everywhere in the US. The latest study, just released on July 12 from Deloitte, estimates that it will require at least $130 billion over the next seven years in fiber investment to make the country fully ready for 5G.

Before digesting that number it’s important first to understand what they are talking about. Their study looks at deploying a ‘deep fiber’ network that would bring fiber close to homes and businesses in the country and then use wireless technology to complete the connection to homes. This is not a new concept and for decades we have referred to this as fiber-to-the-curb. This network design never went very far in the past because there wasn’t a good wireless technology around to make that final connection. This differs from an all-fiber connection by replacing a fiber drop wire to the home with wireless electronics. The only way such a network makes sense is if that difference is a significant savings over an all-fiber connection at the home.

We are now on the verge of having the needed wireless technology. There are now some first-generation wireless connections being tested that could finally make this a viable network deployment. And like with everything new, within a decade the wireless electronics needed will improve in function and cost a lot less.

To put the Deloitte estimate into perspective Verizon claimed to have spent $13 billion on their original FiOS fiber network. Because they were able to overlash fiber onto their own telephone wires the FiOS network cost was built at a relatively low cost of $750 per customer passed. But the Verizon FiOS network never blanketed any city and instead they selectively cherry-picked neighborhoods where the construction costs were the lowest. Verizon had originally told Wall Street they were going to spend $24 billion on fiber, but they abandoned a lot of the planned construction when the costs came in higher than they had expected.

But back to the Deloitte number of $130 billion. That is the cost of just the fiber needed to get deep into every neighborhood in the country. It doesn’t include the electronics needed to broadcast the wireless signal or the electronics needed inside homes and businesses to receive the signal. Nobody yet has any estimate of what that is going to cost, but it won’t be cheap, at least not for a few years. The cost of getting onto utility poles, street lighting poles or of constructing urban towers is not going to be cheap. And the cost of the electronics won’t be cheap until it’s gone through a few generations of refinement. Using Deloitte’s same methodology of estimating and assuming a very conservatively low cost of $500 for electronics per customer, this would add another $30 billion if only half the customers in the country use the new 5G network.

The big question that must be asked when tossing out a number like $130 billion is if there is anybody who is interested in deploying wireless loops in this manner? Such a network would be used to directly compete against the big cable companies. What Deloitte is talking about is not faster cellular service, but fast connections into homes and businesses. Are there any companies willing to spend that much money to go head-to-head with cable networks that will soon be able to deliver gigabit speeds?

The obvious candidates are Verizon and AT&T. Verizon has been talking a lot lately about this potential business plan, and so perhaps they might pursue it. AT&T, while bragging about the amount of money they are spending on fiber, has not shown a huge inclination to dive back into the residential broadband market. And there are not a lot of companies with capital budgets big enough to consider this.

Consider the capital budgets of the five largest telcos. AT&T is on track to spend $22B in 2017, but a lot of that is being spent in Mexico. Verizon’s 2017 capex budget is around $17B. CenturyLink spends something a little less than $3B. Frontier spends around $1B and Windstream spends about $0.8B.

It’s clear that unless AT&T and Verizon are willing to redirect the majority of their capital spending to this new technology that it’s not going to go anywhere. I think it’s clear that both AT&T and Verizon are going to be looking hard at the technologies and doing trials. But even should those trials be successful I can’t see them pouring the needed billions in to build ‘deep fiber’ everywhere. It’s far more likely that the technology will be deployed in the same way that Verizon deployed FiOS – built only where the cost is the lowest and ignoring everybody else.

Both of these companies understand that it’s not going to be easy to wrestle customers back from the big cable companies. Just building these fiber networks is a daunting financial investment – one that Wall Street would likely punish them for undertaking. But even building the needed networks is not going to be any assurance of market success unless they can convince customers they are a better bargain. I just don’t see these companies going hog wild in making the needed investments to deploy this widely, but instead see this as the newest technology for cherry-picking the best opportunities.