Two Views on Skinny Bundles

The industry is abuzz this year with talk about skinny bundles. But there is a lot of disagreement about whether skinny bundles are really going to be effective and if they will put a serious dent in the pay-TV market. Today I look at opposing views from two major players in the industry.

First are the recent statements by David Zaslav, the CEO of Discovery Communications. He says the skinny bundles we see in the US are not really ‘skinny’ and are instead just another way to package traditional programming. He says that Discovery sells programming around the world and that in almost 200 other worldwide cable markets there are true skinny bundles that cost between $8 and $12 per month. He says these bundles are popular and give people a real alternative to the big cable bundles.

By contrast all of the major bundles on the market today in the US are priced at $30 to $60 and just provide a different alternative to the cable companies. The current US bundles are expensive because they include high-cost programming like sports, movie channels and major cable networks.

Zaslav’s statements are somewhat ironic since his company is one of the major programmers that drives up the size and the cost of traditional cable TV big channel line-ups. Discovery today includes a suite of 13 channels such as the Discovery Channel, TLC, Animal Planet, Science, and a host of other Discovery channels. Many of my clients are required to carry all of these channels if they want to carry any of them, and at least eight of these channels are required to be in the lower expanded basic tier where most customers have to pay for them. It’s also interesting that most of the current on-line skinny bundles in the US are not carrying the Discovery networks.

An interesting contrast to this comes from Charlie Ergen, Chairman and CEO of Dish Networks. He is wildly enthusiastic about the current US skinny bundles, including his own Sling TV. He says the company first launched Sling TV to try to lure cord cutters back to a paid subscription. But the company found out that they were instead taking customers away from pay-TV including his own satellite customers from Dish networks.

He believes that the public perceives the current US skinny bundles as a real alternative to the traditional pay-TV bundle. Sling TV has done better in the market than original projections. At the end of the 1st quarter of 2017 the company had 1.3 million customers, about double where they sat just last June. The other similar subscription services from Hulu and YouTube are also doing quite well and together are carving off a noticeable slice of the traditional TV market.

But Ergen admits that his Sling TV is a replacement for traditional TV, not a wildly different alternative. A lot of customers like on-line services because they offer the the ability to start and stop service at will or to add or subtract additional small packages of channels to the line-up as their interests change. It’s certainly possible that much of the success of these new bundles comes from consumers who are fed up with the big cable companies.

It’s also debatable if people who move from traditional cable to Sling TV or similar services can be classified as cord cutters. They are cord cutters in that they got rid of coaxial cable feed from the cable company, but they are still subscribing to a lot of the same channels as before and which are still broadcast at set times on a line-up.

For now it looks like the current skinny bundles are meeting moderate success and are attracting a few million customers. They haven’t been around very long and I suspect that a lot of consumers have either never heard of them or haven’t given them any serious consideration. But you can save money with these packages while gaining the flexibility to connect and disconnect on-line at any time – avoiding those dreadful call to cable customer service.

I know I would love to see the skinny bundles that David Zaslav describes. I imagine that each $8 – $12 bundle contains a limited number of channels. At a small size these are probably as close as anybody can get to a la carte programming. And at the end of the day that’s what a lot of cord cutters really want.

The Valuation of a Cable Customer

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Craig Moffett of MoffettNathanson recently set a valuation of an OTT customer from Sling TV at a quarter of the level of a normal Dish Networks customer. Since almost every small cable provider in the industry is interested in their valuation, I thought I’d talk today about Moffett’s numbers and how they might relate to cable valuation for small cable operators.

First the numbers. Moffett said that a normal Dish Networks cable customer is worth $1,100. That valuation reflects both the operating margin on Dish’s cable business as well as the average expected time that a cable customer stays with the company. Valuation in the industry in general is based on a multiple of operating margin – revenues less operating expenses. I don’t know what Moffett used as a multiple in this case since the valuation of Dish is muddled by the fact that they also own a mountain of spectrum.

Moffett set the value of a Sling TV customer (also operated by Dish Networks) at only $274. This low valuation tells us several things. First, the margins on Sling TV has to be significantly less. The company is obviously setting a low price to attract customers. And while Sling TV has a much smaller channel line-up than the big bundles at Dish Networks, Sling TV includes a lot of the most popular (and expensive) channels such as ESPN and Disney. I would also think that the valuation reflects a much higher churn for Sling TV. Customers are free to come and go easily and can buy service one month at a time. This contrasts to many Dish customers who get low prices by signing up for 1-year or longer contracts.

There are also other cost characteristics that are different for a satellite customer compared to on online customer. For instance, for a satellite customer Dish has to cover the cost of the satellite networks, the cost of the receivers used by customers. Sling TV has to instead just pay for transport of programming through Internet. Both parts of the business have to cover advertising and the cost of billing and back office. But it seems like Sling TV would have lower costs since customers must prepay by credit card. It’s hard to know which has a cost advantage, but I would guess it’s Sling TV. But Dish has millions of customers and would have some significant economy of scale.  

How do these valuations compare to the valuations of small cable providers? The big difference between terrestrial cable providers and Dish is having to provide a fleet of technicians in trucks and maintaining a landline network of some sort. Small cable operators also have to operate a headend and always face upgrades to keep up with the latest innovations in the industry. These costs are far more costly per customer for a small cable operator than what Dish is paying. I would think that due to economy of scale that Dish also has an advantage on costs like customer service, billing, etc. The equipment costs for customers are probably similar for Dish and terrestrial cable operators.

I have analyzed the books of a number of small triple play providers in recent years and if costs are allocated properly to products I haven’t seen one that has a positive margin on the cable TV product. While small cable systems generally charge more than Dish Networks they also pay more for programming. But the main reason that small terrestrial cable operators lose money is the work load associated with supporting cable TV. I’ve done detailed time studies at clients and have seen that in a triple play company that way more than half of the calls to customer service and the truck rolls are due to cable issues. If a small company allocates expenses properly between products, then cable is almost guaranteed to be a loser.

What does that mean for valuation? It’s probably obvious that if one of the major product lines of a company is losing money that the negative earnings pulls down the overall valuation of the business. Said more plainly, if the cable business at a small company is losing money, then that part of the business has no value or even a negative value. This is a conversation I have with clients all of the time, and most small cable providers have at least thought about the ramifications of dropping their cable product.

It’s not quite as easy as it sounds, because if somebody drops cable then they need to also pare expenses that were used to support cable. For a small company that means cutting back on customer service and field technician positions – something that small companies are loathe to do. Small carriers also worry that cutting cable will cost them overall customers, particularly if they are competing against somebody else that offers the triple play. It’s definitely a tough decision, but I’ve heard that as many as fifty small telcos have ditched traditional cable.

I’m also seeing for the first time that many new network operators are launching new markets without cable TV. Or they are instead looking at models where some external vendor like Skitter TV sells cable to customers.

Unfortunately, the cost of programming is still climbing fast and the margins on cable keep worsening for small cable operators. I expect that some time within the next five years or so we will reach a flash point where the collective wisdom of the industry will say that it’s time to ditch cable – and at that point we might see a flood of small companies exiting the business. But I don’t know of a harder decision to make for a small triple play provider.

OTT News, March 2017

There is a lot of activity going on with web-based video. There are offerings that are starting to look like serious contenders to traditional cable packages.

Comcast Integrates YouTube. Comcast has made a deal with Google to integrate YouTube into the Comcast X1 settop box. This follows last year’s announcement that Comcast is also integrating Netflix. Comcast also says they are working to integrate other SVOD platforms.

Comcast is making a lot of moves to keep themselves relevant for customers and to make the X1 box a key piece of electronics in the home. The box also acts as the hub for their smart home product, Xfinity Home.

One has to think that Comcast has worked out some sort of revenue sharing arrangements with Google and Netflix, although all details of these arrangements have not been reported. The most customer-friendly aspect of these integrations is that the Comcast X1 box is now voice-activated and customers can surf Netflix and YouTube by talking to the box.

Sling TV Adds More Sports. Sling TV has made another move that will make it attractive to more customers by adding the Comcast regional sports networks (RSNs) to their line-up. This includes CSN California, CSN Bay Area, CSN Chicago and CSN Mid-Atlantic. These networks carry a lot of unique sports content that is not easily available anywhere else on-line today. The networks carry pro basketball, pro baseball and a number of college sports. For example, CSN Bay Area is the home station for the popular Golden state Warriors. CSN Mid-Atlantic is the home station for the Baltimore Orioles.

I know in talking to my sports-centric friends that the narrow sports content on-line is the number one issue holding them back from switching to an OTT package. There are still other networks that Sling TV would need to add, like the Big Ten Network and the NFL Channel, to be a totally rounded sports provider. But they have already added a credible sports line-up that includes all the ESPN channels, the SEC Network, the ACC Network, NBA TV, the NHL Channel, the PAC12 Network and a few other sports networks like Univision TDN.

YouTube Launching an OTT Line-up. Cable TV just got another new OTT competitor. The new service is called YouTube TV and brings a fourth major OTT competitor along with Sling TV, PlayStation Vue, and DirecTV Now. The platform is going to launch sometime in the next few months, with no firm release date yet. The basic product will be $35 per month and allows customers to turn the service off and on at will.

YouTube TV will carry the typical network channels as well as ESPN, Disney, Bravo and Fox News – a line-up that sounds similar to its competition. The service will come with unlimited cloud DVR storage. It will allow 3 simultaneous streams per account and 6 user profiles per account. They will first launch in a few major urban markets (probably due to the availability of the local channels for various network channels).

If YouTube has any advantage in the marketplace it’s that they are becoming the preferred content choice for a lot of millennials. The company says they now are delivering over a billion hours per day of content. Millennials are leading the trend of cord cutters (and even more so of cord nevers), and if YouTube can tap that market they should do great.

Dish Network Predicts OTT will Replace Traditional TV. For the first time, Dish Networks Chairman and CEO said he thought that OTT programming is the real future of video. Until now the company, which owns Sling TV, has said that their product was aimed at bringing video to cord cutters.

But Sling TV and the other OTT products are getting a lot better. Sling TV now has over 100 channels that provide a wide set of options for customers. And these channels are not packed into a giant must-take line-up like traditional cable packages, and instead provide a number of smaller packages that a customer can add to the Sling TV base package. Sling TV and the other providers also make it easy for customers to add or subtract packages or come and go from the whole platform at will – something that can’t be done with cable companies.

Certainly Sling TV has made a difference for Dish. The company has been bleeding satellite customers and had customer losses for the last ten quarters. But the company had a small customer gain of 28,000 customers in the fourth quarter due to the popularity of Sling TV. The company does not report customers by satellite and OTT, so we don’t know the specific numbers.

The Death of the Big Cable Bundles

TelevisionThere is a ton of evidence that customers no longer want the traditional 200 – 300 channel cable packages. For example, we’ve seen the number of customers of ESPN plunge by millions over the last year to a far greater extent than the overall erosion of the cable industry. The ESPN phenomenon can only be caused by cord shaving – or customers downsizing to smaller packages.

We got more evidence of this last week when Verizon CEO Lowell McAdam said that 40% of cable packages sold on Verizon are now skinny bundles. He said that if he had a preference that Verizon would only offer skinny bundles. He doesn’t believe there is customer demand for the larger packages.

This makes sense and we have had the statistics for years to tell us this. A study by Nielsen earlier this year showed that the average person watches around 17 channels to the exclusion of others. That’s means that the average household is wasting a lot of money paying for channels they don’t want.

Other studies tell us the same thing. A Gallup poll earlier this year said that 37% of households don’t watch any sports. And yet sports programming has become the most expensive component of the big cable bundle. And it’s only common sense that within the 63% who watch sports that a lot of them must be just casual sports fans or fans of only one or two sports.

And the trend has to be downward for the channels on traditional cable. In May of this year Nielsen reported that almost 53 million US homes watch Netflix. Another 25 million watch Amazon Prime. Another 13 million watch Hulu, and since they beefed up their lineup and slashed their price the number of viewers is bound to climb.

Unfortunately skinny bundles are not universally available everywhere. Only the largest cable companies have been able to negotiate for the right to sell smaller bundles so far. And among the large cable providers only Verizon and Dish Network are really pushing the skinny bundles. There are also a few skinny bundles on the web, like Sling TV, but every time I look their packages are getting fatter.

I can’t help but speculate what would happen if every household was given the choice tomorrow to downsize their cable bundle and monthly cable bill. Leichtman Research Group announced a few months ago that the average cable bill in this country is now $103.10. That’s an astronomical number, and if that is the average a lot of homes are paying a lot more than that. Contrast this with new the Dish Network skinny bundle that offers 50 channels for $39.99 per month.

The skinny bundle that is doing so well at Verizon isn’t even cheap and starts at $55 per month – but it’s a lot less expensive than the big traditional bundles. And the Verizon price is reduced significantly for customers buying a triple-play bundle.

I just wrote a blog last week that talked about how Wall Street is becoming unhappy with cable programmers. At least one analyst has downgraded Discovery Networks and Scripps. We might finally be seeing is a whole host of issues coming to bear in the industry at the same time. Cable bills are finally getting too expensive for a lot of homes. People are becoming more interested in content that is not on traditional cable. And the programmers are losing a little bit of the total lock they have had on the industry.

It’s hard to say when, or even if the industry is going to break in any significant way. There are still just under 100 million homes paying for some version of cable TV. And the overall effect of cordcutting has only been shaving that by a little over 1% per year. But if the Verizon trend becomes the norm and most customers start preferring skinny bundles then the industry will still be transformed. ESPN has lost 10 million customers since 2013, but over half of those losses have been in the last year. The same thing has to be happening to many other of the less-popular cable channels, and at some point the math just isn’t going to work for the programmers.

We’ve seen a similar phenomenon once before. We saw a gradual erosion of home landline telephones after the advent of the cellphone. But after a few years of gradual declines we saw a deluge of people dropping home telephones. You could barely turn on a TV without hearing about how having a home telephone was a waste of money, and so it became the popular wisdom that home phones weren’t needed. The same thing could happen with skinny bundles and the industry could be transformed in a short period of time if tens of millions of homes downsize their cable bundle. It is going to happen, we’ll just have to wait and see how fast and to what degree it’s going to occur.

Raising Cable Rates

comcast-truck-cmcsa-cmcsk_largeIt’s that time of the year when the large cable companies all raise their rates. In a time with increasing programming costs every cable provider needs to raise rates annually. I know that a lot of small cable providers are loath to raise rates, but if you have to do it then it’s worthwhile to look first at what the big companies are doing. Following is a summary of the rate increases that have been announced so far this year:

Comcast as usual looks to have one of the largest rate increases. They announced an overall increase of 4%, but the details seem to show something larger. The company is raising the rate on double-play packages by $3 to $4 per month. They are also raising the ‘broadcast TV fee’ from $3 to $5. This is a fee that really ought to be included in cable rates which they have broken out as a separate charge to supposedly cover the cost of paying for local network retransmission fees. That makes their overall increases to be between $5 and $6, which is hard to reconcile with the 4% increase statement. But perhaps some of the increase is being counted as broadband increases. It’s really hard to know how these big companies think about the components of their bundles, and all that really matters to customers is how much their bill goes up.

Comcast did cut the cost of HBO from $21.95 to $15 to match the price for HBO’s direct online product. This is an interesting cut that some other large companies are matching. Perhaps this was one of HBO’s reasons for putting their network directly online. You would think that lower prices at the cable companies ought to increase HBO customers.

Time Warner Cable looks to also have a sizable rate increase. They raised the prices of cable packages between $2 and $4 per month. They also increased their broadcast TV fee by $1. Time Warner has broken out a sports programming fee as a separate billing item – something that also ought to be included in the cable prices – and raised this rate by $2.25 per month, up to $5. There are also small increases on settop boxes.

Cablevision says their average increase will be $3 per customer. That includes a $0.85 increase in the settop box rental fee. Their sports surcharge is going up $1 to $5.98.

AT&T is increasing the cost of all bundles by $2 per month. Several Spanish packages are going up between $3 and $4. The company increased its ‘broadcast surcharge’ by $1. While not TV, the company is increasing its voice product that includes 250 long-distance minutes by $2 to $27. I haven’t seen an increase in voice prices for a while. I also find it interesting that the company with the largest voice network is charging more for a package with 250 long distance minutes than most companies charge for unlimited LD.

DirecTV increased rates across the board. Their lowest tiers are increasing by $2 per month. Their ‘Choice’ and ‘Xtra’ bundles will go up by $4 and their largest package will increase by $8. They are also increasing the broadcast TV fee by $0.50, up to $6.50.

Dish Networks is increasing rates significantly. Most packages including ‘America’s Top 120’, ‘America’s Top 120 Plus’, ‘America’s top 200’ and ‘America’s Top 250’ are going up by $5 per month. This will be a relief to rural systems that compete against them. Their smallest package is going up $2 per month while their ‘Everything’ package is going up $8 to $140 per month.

Charter hasn’t announced any rate increases and may not do so until the expected merger with Time Warner Cable.

Verizon also hasn’t announced increases yet for its FiOS TV products, although increases are expected.

Who is Dropping Cable?

RCA_CT100-hdFierce Cable reports that the average revenues per customer are rising at many cable companies as they lose customers. This seems to indicate that a lot of people that are dropping cable were buying the lower-priced packages.

Here are some of the numbers they reported from the second quarter of 2015:

  • DirecTV lost 133,000 customers but saw the average revenue per customer rise 6.4% to $109.93.
  • Dish lost 81,000 customers but average revenue per customer rose 4.4% to $87.91.
  • Charter dropped 33,000 customers and saw average revenue jump 4.5% to $92.88.
  • Overall the largest cable providers combined saw average revenue per customer in the quarter rise by 6.7%.

Now to be fair about those numbers, a lot of these companies raise rates in the first quarter each year, making the second quarter the first period that sees the full impact of rate increases.

But the numbers do hint at the underlying cause of cord-cutting. I will admit that I’ve always figured cord cutters were coming from the tech savvy and from those who have decided that that they can live with the many alternatives for entertainment available on the web. My perspective has probably been influenced by the cord cutters I know, and it’s always a dangerous thing to take personal experience and extrapolate it to a national trend.

But if it’s true that cord-cutting is more driven by economics then we have a different phenomenon. People are being driven off cable because they are getting priced out of the market. I’ve been predicting for years that this day would come because cable rates have been rising far faster than inflation for a long time. And that eventually has to have an effect.

Just look at the above numbers. I am a bit astounded by the DirecTV numbers. If $109.93 is the average revenue per customer then there are a lot of people spending a lot more than that to offset the low special prices the company offers to new customers.

It’s easy to forget how fast rates can get out of control. But an $80 cable package will cost $105 in five years with a 5.5% annual rate increase or $112 with 7% rate increases. Looking at all of the big companies, one has to wonder how they are going to sell the value of their product 5 and 10 years from now.

I can see how cable rates are becoming unaffordable for lower-income families, but it’s not going to be that long until this starts being out of the range of a whole lot more families. Even without the pressure from OTT programming, the industry is headed down a path of real trouble.

And you have to feel sorry for cable companies. The cost of programming has been skyrocketing. I have a few clients who have seen 15% rate increases over the past two years. They grimace every time they have to raise rates and they are all seeing customers falling off their systems.

Big companies like Comcast are probably going to find a competitive option for the big cable packages. They are already looking at their own version of OTT programming. But unless the FCC can break the monopoly of the programmers the smaller cable companies are going to have very few options other than to watch their customers disappear. Almost all of my clients are losing cable customers at a faster rate than the large ones and I have a number of them already seeing 5% to 7% annual customer dropoff.

But the FCC can fix the problem if they choose. One of the biggest problems today is that the major programmers make cable providers take all of their huge suite of channels if they only want one of them. We all know there are a ton of channels on cable systems that hardly anybody watches but that everybody is being forced to pay for. If cable systems could choose the channels they want, like is possible with products in almost every other industry, then they could control their cost and could get the rate increases back under control.

What’s Up With Cable?

Fatty_watching_himself_on_TVThe results for 2014 are in, so today I am going to take a fresh look at the cable industry. The largest nine traditional cable companies lost just under 1.2 million cable customers in 2014, an improvement over the 1.7 million they lost in 2013. But looking at the bigger picture, the top thirteen cable companies lost only 125,000 customers for the year, which is slightly higher than 95,000 in 2013. Within those numbers, Direct TV and Dish Networks together added 20,000 subscribers for the year and Verizon and AT&T added just under 1.1 million cable customers for the year, down from 1.4 million from the prior year.

The industry as a whole is hanging solid and these thirteen companies have 95.2 million customers. Hidden in these numbers is the growth of cord cutters. For a number of years running, the cable industry as a whole has been slightly shrinking even though there is roughly one million new households entering the market each year.

Of course, the growth for the cable companies is in broadband. The largest cable companies in the group added 2.6 million high-speed data customers in 2014, while AT&T added 1,000 and Verizon 190,000. Time Warner Cable said in their annual report this year that their data product has a 97% margin, a number that opened a lot of eyes.

There are two other trends that are not captured in these numbers. First is the growth in time spent by people watching online programming like Netflix and Amazon Prime; and with that a corresponding decrease in time spent watching traditional cable TV programming. The overall hours spent per viewer for traditional cable dropped 4.4% for the year, but Nielsen reported that this was accelerating at the end of 2014. The most shocking number published this year came from Nielsen which reported that over 10 million millennials had largely fled linear TV just in the last year. Primetime viewing dropped by 12% during 2014 as more viewers are changing to time-shifted viewing.

The other trend is in the continued increase in rates. Most of the cable companies are reporting profits up 7–9%, due in part to more data customers, but also due to continued rate increases. As an example, Cablevision raised cable rates by 5.3% last year, or $7.86 and their average revenue per customer is now up to $155.20. It’s a bit mind boggling to think that’s the average and that there are a lot of households paying a lot more than that.

For yet another year the largest cable companies came in dead last in nationwide customer satisfaction surveys. This puts cable companies behind banks, airlines, and large chain stores and the satisfaction scoring for the cable companies dropped significantly just since 2013.

There is anxiety in cable boardrooms. Just in the last weeks there have been mixed signals from Wall Street when some industry analysts downgraded cable stocks due to the FCC’s net neutrality ruling, while others said there would be no significant impact from it. I tend to side with the second crowd since the FCC has excused broadband from rate (and most other kinds of hands-on) regulation.

But the real anxiety comes from a look at the demographics supporting the industry. The average age of cable viewers is increasing quickly as younger people eschew watching traditional TV. The average age of viewers for many shows and networks is now over 55, up sharply from even a decade ago. This is already starting to be felt in terms of advertising revenues, with the pre-sale for the current ad season down sharply from 2013.

There is also a lot of anxiety over Over-the-Top (OTT) programming on the web. It seems like there are weekly announcements of new alternatives coming online. The biggest recent shocks were when HBO, Disney, and ESPN said they would have some product on the web. These have been considered the bedrock channels of the cable company line-ups. Sling TV seems to be doing well with an abbreviated line-up (but which keeps growing). Sony is supposed to be unveiling what they are calling a major new online product later this year, and there are another dozen companies trying to put together web TV packages. The FCC is also looking at changing the rules that might make it easier for online content providers to obtain programming. The feeling is that 2015 is possibly going to be a sea change year and that we will start to see major shifts in the industry.

Meanwhile, programmers keep raising the rates they charge to cable companies, and the rate of programming increases is accelerating. Many programmers don’t seem overly concerned about the problems faced by the cable companies because many of them expect to have content included in online packages, and many are seeing explosive growth internationally in subscribers.

Liberty Media chairman John Malone chastised the industry recently for not implementing TV everywhere fast enough. That is the product that lets customers watch programming on any device on their own time. He says that this is probably the number one reason why Netflix and others have fared so well (which does sort of ignore the cost issue).

The larger cable companies are putting more effort into this area as witnessed by the new X1 settop boxes that Comcast is deploying. They have reported that there is significantly less churn from customers who have the newer technology. What can be said is that the industry is in turmoil. It may not look so bad when looking at customer numbers, but everybody in the industry senses that things are going to start changing quickly.

As an aside, I know somebody with the new X1 box and they tell me a different story than what Comcast is publicly saying. They recently moved and were given the new X1 box and they hate it. It regularly won’t record shows, or it goes offline and they can’t access regular programming or their recorded programming. They’ve asked repeatedly to get back their old style of box. They instead have been given numerous credits and one manager, as he was giving them a credit, admitted that Comcast had rolled out the new box too fast and there were problems with it everywhere. They have called several times to cancel but have instead been given another credit. When I told them what I was writing, they speculated that there is less churn because Comcast is just not letting people go. I don’t know how widespread the problems are with the new box, but cable companies have been known to withhold bad news from investors in the past.

The FTC and Technology

federal-trade-commission-ftc-logo_jpgLast week I wrote about how the Federal Trade Commission was going to start watching the Internet of Things. I will admit that this is maybe only the second or third time in my career that I can recall the FTC being involved in anything related to telecom. So I did some digging and I think we are going to be hearing about them a lot more. The FTC is turning into one of the primary watchdogs of technology.

The FTC was created by President Woodrow Wilson in 1914 to fight against big trusts. In those days large corporations like Standard Oil and America Tobacco held monopoly power in their industries. The Sherman Act was passed as a way to battle the largest monopolies, but Congress wanted a second mechanism to control the worst practices of all corporations. The FTC was created 100 years ago to protect consumers against the practices of large corporations.

The FTC got their powers expanded in 1938 when Congress gave them explicit authority to combat “unfair methods of competition”. Since then the agency became increasingly active in protecting the public against unfair trade practices.

It is not surprising to see the FTC getting involved with technology since it is becoming the primary way that companies interface with people. The FTC has been engaged for years in a few areas that involve the telecom industry. For instance, they have been the watchdog for years for issues like deceptive advertising, poor billing practices, and violations of customer privacy.

As an example, there have been a number of FTC actions over the years with AT&T. Not that I particularly want to single out AT&T, because the FTC has been engaged with all of the large carriers over the years. However, just last year the FTC got AT&T to refund $80 million to wireless customers who had been crammed with fraudulent third party charges. In 2009, the FTC faulted the company for denying phones to people based upon having poor credit since they had not explained the policy to the public. And now the FTC is going after AT&T for fraudulent advertising since their unlimited mobile data plans are not actually unlimited.

One area of FTC focus for the last few years has been the security of customer data. For example, they have fined a number of companies that had security breaches that released customer credit card and other personal information if those companies had not taken reasonable precautions to protect the data.

While companies sometimes fight the FTC, the more normal response is for the agency and a company to come to a mutually acceptable change in behavior through a consent decree. Following are a few cases related to our industry that were not amicably resolved and that instead resulted in suits by the FTC to stop bad corporate behavior:

  • Amazon. Last year the FTC sued Amazon to get them to stop the practice where children could rack up huge bills on cell phones by purchasing add-ons for computer games without parental approval. There were even game apps for pre-school age kids who clearly cannot yet read that allowed a player to buy extra features of the game by hitting a button.
  • Snapchat. Last year the FTC sued Snapchat because they told customers that their data on the network was private and protected, while it wasn’t.
  • Dish Network. In 2012 the FTC sued Dish Network for making telemarketing calls in violation of the Do Not Call rules.
  • Robocalling. In 2009 the FTC sued to stop numerous companies who were using robocalls to sell fraudulent products.
  • Data Brokers. The FTC sued LeapLab of Arizona for selling consumer data that included details like bank account numbers.
  • Spam. The FTC took legal steps to shut down Triple Fiber Networks (3FN.net) which hosted huge quantities of spam emails.
  • Intel. In 2009 the FTC sued Intel for using its monopoly power to artificially inflate the cost of computer chips.

As privacy and data security become even more important, we will probably see the FTC become very active in our industry. Interestingly, most of the FTC’s work is done quietly and without press. It contacts companies against which there are multiple public complaints. They generally investigate the complaints and try to get companies to change their bad behavior. And most companies agree to make changes. But the FTC has the ability to levy large fines and will do so for companies who repeat bad behavior or who violate a prior consent decree.

The Upcoming AWS Spectrum Auction

Transmitter_tower_in_SpainThe FCC’s auction for new cellular data spectrum will begin on November 13. This is the first big spectrum auction in six years, so it’s worth watching. The spectrum being auctioned is being referred to as AWS or Advanced Wireless Spectrum. There are three separate bands being auctioned that go from 1,695MHz to 1,710MHz, from 1,755MHz to 1,780MHz and from 2,155MHz to 2,180MHz.

The FCC has set aside a reserve big for the auction at $10.5 billion. That means that if they don’t receive bids totaling at least that much in the first round that the FCC has the right to cancel the auction. Assuming that price is met, then the normal FCC bidding process will take place and one would expect the auction to go for a few more rounds.

The AWS spectrum is expected to be used almost entirely for data, and both Verizon and AT&T already own some spectrum that sits next to these new blocks. That is going to make it fairly easy for carriers to incorporate the spectrum into handsets. Further, this same spectrum is used in Europe for wireless data, meaning that there are already a wide array of handsets capable of using the spectrum.

Because it’s high frequency, this spectrum is capable of handling a lot of data. However, like other high frequencies it’s not great at penetrating building walls and other obstacles. Contrast this to the next auction that’s on the horizon. In two years the FCC will be auctioning chunks of the 600 MHz spectrum that is being vacated by television stations. This frequency can penetrate into elevators but doesn’t carry as much data per channel as the higher frequencies.

As you would expect the bulk of the spectrum is going to be auctioned to the largest carriers. It is expected that T-Mobile is going to be aggressive in the auction with AT&T and Verizon also buying a lot of spectrum. Sprint is expected to sit out the auction since they already own a lot of high frequency bandwidth. The wildcard player is going to be Dish Networks which may go after a lot of this spectrum. Dish has announced plans to offer a fixed data product using wireless spectrum that will also be used to deliver a cable TV line-up. This spectrum would give them more bandwidth for that offering.

The AWS spectrum is not immediately available since the Department of Defense and a few other government agencies still occupy some of the spectrum. It is expected that the bulk of the government usage will be gone in about two years, but these kinds of transitions almost invariably take longer than expected. This means that it’s unlikely that the bandwidth will have much of an impact on wireless data speeds until the two to three year time frame.

The spectrum is being auctioned off by market and as you would expect this means a wide variance in the interest by the carriers in any given market. In similar auctions in the past some markets went unclaimed, meaning that nobody was willing to pay the FCC’s minimum bid for the market, and if that happens again you can expect a second auction of the leftover, and certainly rural markets. This auction does have some incentives for small bidders and while the big carriers will grab the vast majority of the spectrum you can expect to see smaller companies going after secondary and rural markets.

The auction is expected to be tactical is that each carrier has holes they are trying to fill in certain markets. And the big carriers are keeping the upcoming 600 MHz auction in mind and may hold off on bidding now in markets where they would rather have that spectrum. This makes the auction a big chess game by market. The funny thing is that the carriers know exactly what each other already owns in terms of spectrum, so they know basically what each other is most interested in. But because there are two auctions close together or very different spectrum, nobody is going to know each other’s strategies until the first round bidding is done. The auction is often finished after the first round for a lot of markets and the following rounds are usually only for the prime markets.

I just looked at the amount of spectrum that cellphone users consume late last week. The current statistics show that the average landline connection is using almost 100 times more aggregate data in a month (download and upload combined) than the average cell phone. With that said, Cisco has predicted that the amount of wireless data usage will triple over the next five years, and many analysts think this is conservative.

It’s obvious that cellphone data is never going to rival landline data usage or even come close. I chuckle whenever I see somebody say that wireless data will win the bandwidth battle. There just is not enough wireless spectrum for that to ever happen. While cellular data usage is now doubling every five years, landline data is doubling every three years and one has to carry that trend out twenty years to see that the average landline home connection might be using nearly a terabit of data each month.

But we like using data on our cellphones. The wireless carriers have trained us to be very cautious in that usage because of the severe data caps and the horrendously high price for exceeding your data cap. But even with those restrictions, the wireless carriers need more spectrum and are expected to make this an interesting auction.

Chipping Away at the Cable Industry

Digital-tv-antenna-620x400It seems that every day I read a story about some big company who is working very hard to break the cable monopoly and to bring alternate programming packages to the market. Aereo is at the Supreme Court this week for trying just that – for bringing a small package of network channels to cell phones and tablets in major metropolitan areas.

Yesterday I read that Dish Networks expects to have a new service out by late this summer that is going to further chip away at the cable industry. They plan to offer a smaller package of programs over the web that are aimed at Millennials that will let them watch TV on smartphones and tablets for $20 – $30 per month. But I think a package like that is going to be appealing to a lot of households and is going to lead to a lot more cord cutters.

Dish has already signed up Disney, which brings them Disney, ESPN and ABC. They have reportedly been in negotiations with A&E, Turner, Comcast (which includes NBC) and CBS. The largest content providers have reportedly placed some contractual conditions on Dish getting such a package. They must include at least two of the major networks of ABC, CBS, FOX and NBC. They also must include at least ten of the highest-rated other networks in the package.

This concept is not new for Dish and they already sell packages on the web in fifteen different languages that they market under the name of DishWorld. This includes packages at $14.95 per month in Arabic, Hindi, Cantonese, Urdu, Filipino, Punjabi and many other languages and is a great way for emigrants to see programming from their home countries.

In another announcement that came out today, HBO, a division of Time Warner agreed to sell its library of original content to AmazonPrime. This is the first time that HBO or any cable network has made such a deal. This content has been made available on the web to people who subscribe to HBO at a major cable company like Comcast or Verizon. But the content has never been available to people who did not subscribe to HBO.

No one of these deals is going to break the cable industry. However, these two particular deals will chip away at the subscribers who buy traditional cable packages. These are deals that will let people get content on the web in a way they could not get it before. I think it is these sorts of deals that will chip away at the cable industry, and the industry won’t die in a big bang but will die from a thousand cuts.

Dish will lure away a pile of cord-cutters with this package. Verizon Wireless will lure away another pile. Google, or somebody non-traditional will get the rights to the NFL Sunday package and will lure away a pile. Somebody will make a deal with ESPN and the other key sports networks and take a pretty big pile. The Dish deal is the first major OTT deal but it will not be the last. As the programmers find a way to monetize their content over the web we are going to see more and more people dropping the giant packages. Virtually nobody is happy about paying for content they never watch.

Interestingly, not everybody sees the world in this same way. Here is one guy who sees a rebound for the traditional cable providers. He sees an increase in both customers and penetrations through 2019 for the cable industry. Nothing is impossible and we don’t have to wait long to see if he is right, but just about everybody else predicts that the large cable companies are going to keep losing customers and that the rate of loss will accelerate. Every little side deal made with Dish Networks or Verizon Wireless or Google is going to drag another pile of customers away from the big dollar, big-channel packages.

And at some point, the big line-up model starts breaking when programmers start getting less revenues for the less popular channels that are not being included in the new Internet-only alternatives. ESPN and Disney and the other popular networks are going to do just fine since they will probably be viewed by more people than ever. But the other 80% of networks have to be very worried about the trend towards OTT.