Tearing Down Rural Copper

In his FCC blog, FCC Chairman Ajit Pai is touting the June 7 open FCC meeting as his own version of “Avengers: Infinity War”. He says the FCC is taking on familiar headliners like “freeing up spectrum, removing barriers to infrastructure buildout, expanding satellite services, modernizing outdated rules, eliminating waste, improving accessibility, protecting consumers—and rolling them into one, super-sized meeting.”

I want to focus on the agenda item “removing barriers to infrastructure buildout”. The Chairman goes on in his blog to say the following about that topic:

Removing regulatory barriers to encourage the deployment of next-generation networks and close the digital divide certainly fits that bill. That’s something that consumers strongly support; as I’ve traveled from the Mountain West to the Gulf Coast, I’ve heard many of them say that they want to benefit from modern, more resilient technologies like optical fiber instead of limping along with slower services like DSL provided over old, often-degraded copper. To respond to that desire, I’ve shared an order with my colleagues that would make it easier for companies to discontinue outdated, legacy services and transition to the networks of the future. These reforms would enable the private sector to stop spending scarce dollars propping up fading technologies of the past and promote investment in technologies of the future. They will also make it easier to restore service in the aftermath of natural disasters and other catastrophic and unforeseen events. 

The Chairman’s rhetoric sounds great and anybody in rural America would love for the FCC to help them “benefit from modern, more resilient technologies like optical fiber”. However, this is another false narrative coming from the Chairman. Rather than promoting fiber or fast broadband, the FCC will be voting on the attached order which authorizes the following:

  • Expedites the ability of telcos to discontinue broadband services slower than 25/3 Mbps;
  • Streamlines the process for discontinuing legacy voice services.
  • Eliminates the notice periods that telcos must give to customers before discontinuing legacy services or tearing down copper;
  • Extends streamlined notice period during force majeure events, meaning telcos can walk away from a legacy network that gets damaged from a natural disaster, like happened a few years ago on Fire Island after hurricane Sandy.

This order makes it a lot easier for AT&T and the other giant telcos to walk away from their copper technology, their DSL networks and their legacy copper services. This comes straight from the wish list of the big telcos and is another example of how this FCC is is handing the reins to the big ISPs.

The premise behind the Chairman’s rhetoric is that we must be able to discontinue the old copper networks if we are to make the investments in newer broadband technologies. This sounds like a reasonable premise except for one thing: the big telcos are not going to be bringing fiber or technologies like 5G to rural America today, tomorrow or ever.

This docket does nothing more than make it easier for the big telcos to kill copper and DSL networks and walk away from rural America. We all know those networks are dying and eventually have to come down. What bothers me about the Chairman’s rhetoric is that he is hiding the truth about this agenda item behind a lie – that tearing down the old networks somehow makes it easier to build new networks. There will be many rural households hurt by this docket. The farm with no broadband and no cellular coverage is going to see their copper lines torn down and will lose their landlines, their last remaining connection to the outside world, and the Chairman doesn’t want to publicly say that he thinks that is okay. The big telcos would like nothing more than to completely wash their hands of rural markets and this FCC is making it easier for them to walk away.

The Chairman is painting a picture that killing copper is the first step towards getting faster broadband in rural America and that’s the big lie. The FCC has it within their authority to force the big telcos invest some of their profits back into rural America, but they are instead letting them walk away. Once the copper lines are down there will be nothing to replace them and future regulators will have zero leverage over the telcos after the copper networks are gone.

I find it disturbing that we have regulators without the courage to tell the American public the truth. If this FCC believes that it’s time to start tearing down rural copper, then they should say so. They know there is nothing to replace rural copper and so they are sugarcoating the topic to avoid the wrath of angry citizens. It’s disingenuous to paint the picture that this FCC is going to bring better broadband to rural America when we all know that’s not true.

AT&T’s Fiber Strategy

On the most recent earnings call with investors, AT&T’s EVP and CFO John Stevens reported that AT&T has only 800,000 customers nationwide remaining on traditional DSL. That’s down from 4.5 million DSL customers just four years ago. The company has been working hard to work its way out of the older technology.

The company overall has 15.8 million total broadband customers including a net gain of 82,000 customers in the first quarter. This compares to overall net growth for the year of 2017 of only 114,000 customers. The company has obviously turned the corner and after years of stagnant growth is adding broadband customers again. The overall number of AT&T broadband customers has been stagnant for many years, and if you go nearly a decade the company had 15 million broadband customers, with 14 million on traditional DSL.

The 15 million customers not served by traditional DSL are served directly by fiber-to-the-premises (FTTP) or fiber-to-the-node (FTTN) – the company doesn’t disclose the number on each technology. The FTTN customers in AT&T are served with newer DSL technologies that bond two copper pairs. This technology generally has relatively short copper drops of less than 3,000 feet and can deliver broadband download speeds above 40 Mbps download. AT&T still has a goal to pass 12.5 million possible customers with fiber by the end of 2019, with an eventual goal to pass around 14 million customers.

The AT&T fiber buildout differs drastically from that done by Verizon FiOS. Verizon built to serve large contiguous neighborhoods to enable mass marketing. AT&T instead is concentrating on three different customer segments to reach the desired passings. They are building fiber to business corridors, building fiber to apartment complexes and finally, offering fiber to homes and businesses that are close to their many existing fiber nodes. Homes close enough to one of these nodes can get fiber while those only a block away probably can’t. It’s an interesting strategy that doesn’t lend itself to mass marketing, which is probably why the press has not been flooded with stories of the company’s fiber expansion. With this buildout strategy I assume the company has a highly targeted marketing effort that reaches out only to locations it can easily reach with fiber.

To a large degree AT&T’s entire fiber strategy is one of cherry picking. They are staying disciplined and are extending fiber to locations that are near to their huge existing fiber networks that were built to reach large businesses, cell sites, schools, etc. I work across the country and I’ve encountered small pockets of AT&T fiber customers in towns of all sizes. The cherry picking strategy makes it impossible to map their fiber footprint since it consists of an apartment complex here and a small cluster of homes there. Interestingly, when AT&T reports these various pockets they end up distorting the FCC’s broadband maps, since those maps count a whole census block as having gigabit fiber speeds if even only one customer can actually get fiber.

Another part of AT&T’s strategy for eliminating traditional DSL is to tear down rural copper and replace DSL with cellular broadband. That effort is being funded to a large extent by the FCC’s CAF II program. The company took $427 million in federal funding to bring broadband to over 1.1 million rural homes and businesses. The CAF II program only requires AT&T and the other telcos to deliver speeds of 10/1 Mbps. Many of these 1.1 million customers had slow DSL with typical speeds in the range of 1 Mbps or even less.

AT&T recently said that they are not pursuing 5G wireless local loops. They’ve looked at the technology that uses 5G wireless links to reach from poles to nearby homes and said that they can’t make a reasonable business case for the technology. They say that it’s just as affordable in their expansion model to build fiber directly to customers. They also know that fiber provides a quality connection but are unsure of the quality of a 5G wireless connection. That announcement takes some of the wind out of the sails for the FCC and legislators who are pressing hard to mandate cheap pole connections for 5G. There are only a few companies that have the capital dollars and footprint to pursue widespread 5G, and if AT&T isn’t pursuing this technology then the whole argument that 5G is the future of residential broadband is suspect.

This is one of the first times that AT&T has clearly described their fiber strategy. Over the last few years I wrote blogs that wondered where AT&T was building fiber, because outside of a few markets where they are competing with companies like Google Fiber it was hard to find any evidence of fiber construction. Instead of large fiber roll-outs across whole markets it turns out that the company has been quietly building a fiber network that adds pockets of fiber customer across their whole footprint. One interesting aspect of this strategy is that those who don’t live close to an AT&T fiber node are not likely to ever get their fiber.

CenturyLink and Residential Broadband

CenturyLink is in the midst of a corporate reorganization that is going to result is a major shift in the focus of the company. The company merged with Level 3 in 2016 and the management team from Level 3 will soon be in charge of the combined business. Long-time CEO Glen Post is being pushed out of day-to-day management of the company and Jeff Storey, the former CEO of Level 3 will become the new CEO of CenturyLink. Storey was originally slated to take the top spot in 2019, but the transition has been accelerated and will happen this month.

It’s a shift that makes good financial sense for the company. Mr. Storey had huge success at Level 3 and dramatically boosted earnings and stock prices over the last four years. Mr. Storey and CenturyLink CFO Sunit Patel have both made it clear that they are going to focus on the more profitable enterprise business opportunities and that they will judge any investments in last-mile broadband in terms of the expected returns. This differs drastically from Mr. Post who comes from a background as an independent telephone company owner. As recently as a year ago Mr. Post publicly pledged to make the capital investments needed to improve CenturyLink’s last-mile broadband networks.

This is going to mean a drastic shift in the way that CenturyLink views residential broadband. The company lost 283,000 broadband customers for the year ending in December 2017, dropping them to 5.7 million broadband customers. The company blames the losses on the continued success of the cable companies to woo away DSL customers.

This size of the customer losses is a bit surprising. CenturyLink said at the end of 2017 that they were roughly 60% through their CAF II upgrades which is bringing better broadband to over 1.1 million rural households. Additionally, the company built FTTP past 900,000 potential business and residential customers in 2017. If the company was having even a modest amount of success with those two new ventures it’s hard to understand how they lost so many broadband customers.

What might all of this mean for CenturyLink broadband customers? For rural customers it means that any upgrades that are being made using CAF II funding are likely the last upgrades they will ever see. Customers in these rural areas are already used to being neglected and their copper networks are in lousy condition due to decades of neglect by former owner Qwest.

CenturyLink is required by the CAF II program to upgrade broadband speeds in the rural areas to at least 10/1 Mbps. The company says that over half of the upgraded customers are seeing speeds of at least twice that. I’ve always had a concern about any of the big telcos reaching the whole CAF II footprint, and I suspect that when the CAF II money is gone, anybody that was not upgraded as promised will never see upgrades. I’ve also always felt that the CAF II money was a waste of money –  if CenturyLink walks away from the cost of maintaining these newly upgraded DSL networks they will quickly slide back into poor condition.

There are already speculation on Wall Street that CenturyLink might try to find a buyer for their rural networks. After looking at the problems experienced by Frontier and Fairpoint after buying rural telco copper networks one has to wonder if there is a buyer for these properties. But in today’s world of big-deal corporate finance it’s not impossible to imagine some group of investors willing to tackle this. The company could also take a shot at selling rural exchanges to independent telcos – something US West did over twenty years ago.

It’s also likely that the company’s foray into building widespread FTTP in urban areas is done. This effort is capital intensive and only earns infrastructure returns that are not going to be attractive to the new management. I wouldn’t even be surprised to see the company sell off these new FTTP assets to raise cash.

The company will continue to build fiber, but with the emphasis on enterprise opportunities. They are likely to adopt a philosophy similar to AT&T’s which has been building residential fiber only to large apartment complexes and to households that are within short distances from existing fiber pops. This might bring fiber broadband to a lucky few, but mostly the new management team has made it clear they are deemphasizing residential broadband.

This management transition probably closes the book on CenturyLink as a last-mile ISP. If they are unable to find a buyer for these properties it might take a decade or more for their broadband business to quietly die. This is bad news for existing broadband customers because the company is unlikely to invest in keeping the networks in operational shape. They only ones who might perceive this as good news are those who have been thinking about overbuilding the company – they are not going to see any resistance.

“But I Live Close to Fiber”

I often hear from people who are excited that fiber is coming to their neighborhood. They see work crews installing fiber and they hope this means that they are finally getting fiber to their homes. But unless folks are in one of the lucky neighborhoods where some ISP is making the big investment in last mile fiber-to-the-home, the chances are good that the new fiber that is tantalizingly close is not going to reach them.

There are a lot of fiber networks in the country that are being used for purposes other than serving homes. Consider some of the following reasons why fiber might be close to you, but unavailable:

  • Electric companies have private fiber networks to connect substations and other electric company facilities. In the last few years we’ve seen some of the biggest electric companies pull back from sharing fiber with others because of security concerns for the electric grid. It’s not uncommon for the electric company to be the only tenant on such fibers.
  • Telcos have fiber networks that connect their central offices in various towns. They have more extensive local fiber networks that are built to supply neighborhood DSL cabinets. If your neighborhood has DSL speeds greater than 15 Mbps, the chances are good that there is telco fiber close to you.
  • Cable companies have fiber for similar reasons. Cable networks are subdivided into neighborhood nodes. These nodes used to be large and served upwards of a thousand homes, but cable companies have reduced node sized to eliminate the problem of their broadband slowing down in the evenings. Nodes might now be as small as a hundred homes – and since each node is fiber fed there is cable company fiber somewhere near to every cluster of homes.
  • A large number of cities have built fiber networks to connect city hall, libraries, firehouses, water utility facilities and other city locations. This has largely been done to reduce the high payments to ISPs to connect these locations with broadband. While many municipal FTTH projects got started by expanding these networks, the vast majority of the municipal fiber networks serve only the city. There’s a decent chance that there is fiber at the library, firehouse or other city facility near your neighborhood.
  • Similarly there are a number of states that have built state-wide fiber networks to connect their own facilities. These networks are often shared with anchor institutions like city halls and other local and state government buildings. Most of these networks are prohibited by state law from sharing the fiber with last-mile fiber builds, even municipal ones.
  • Many school districts have fiber networks to connect schools to provide gigabit speeds. While some of these networks can be shared with other providers, the majority of these networks are used only for the school district.
  • Various companies including telcos, cable companies, and big ISPs build fiber to reach large businesses or industrial parks. The larger downtown buildings in most cities now also have fiber.
  • There is now a major push for building fiber to large apartment complexes. For example, a lot of the push by AT&T to pass millions of locations with fiber is mostly being done by reaching apartment complexes.
  • Today every cell tower is fed with fiber. There will be a lot of new fiber built to reach the smaller cell sites we’ll see on utility and light poles.
  • There are long-haul fiber networks that only function to connect cities and major markets. These networks rarely allow any connections to the network other than at major network nodes.
  • Many cities now have fiber networks that feed traffic signals and traffic cameras. Because of the way that these networks are funded with highway money, these fiber networks are often inexplicably separate from other municipal fiber networks.
  • State highway departments also now operate a lot of fiber networks for their own use to feed the signs that provide traffic information and to feed cameras that are used to monitor traffic.

The chances are that if you live in any kind of populated area, even in rural counties, that there are several of these fiber networks close to you. If you live in a city it’s likely that you can easily walk to half a dozen different fiber networks – none which are being used to bring fiber to your home.  The chances are high that the new fiber you see being built is not being built for you.

Progress of the CAF II Program

If readers recall, the CAF II program is providing funds to the largest telcos to upgrade rural facilities in their incumbent operating territories to broadband speeds of at least 10 Mbps down and 1 Mbps up. The CAF II deployment began in the fall of 2015 and lasts for 6 years, so we are now almost 2.5 years into the deployment period. I was curious about how the bigger telcos are doing in meeting their CAF II build-out requirements. The FCC hasn’t published any progress reports on CAF II deployments, so I found the following from web searches:

AT&T. The company took $427 million annually for the six years ($2.56 billion) to bring broadband to 2.2 million rural customers. The company has said they are going to use a combination of improved DSL and fixed wireless broadband using their cellular frequencies to meet their build-out requirements. From their various press releases it seems like they are planning on more wireless than wireline connections (and they have plans in many rural places of tearing down the copper).

The only big public announcement of a wireless buildout for AT&T is a test in Georgia initiated last year. On their website the company says their goal at the end of 2018 is to offer improved broadband to 440,000 homes, which would mean a 17% CAF II coverage at just over the mid-point of their 6-year build-out commitment.

On a side note, AT&T had also promised the FCC, as a condition of the DirecTV merger that they would be pass 12.5 million homes and business with fiber by mid-2019. They report reaching only 4 million by the end of 2017.

CenturyLink. CenturyLink accepted $500 million annually ($3 billion) in CAF II funding to reach 1.2 million rural homes. In case you’re wondering why CenturyLink is covering only half of the homes as AT&T for roughly the same funding – the funding for CAF II varies by Census block according to density. The CenturyLink coverage area is obviously less densely populated than the areas being covered by AT&T.

FierceTelecom reported in January that CenturyLink has now upgraded 600,000 CAF II homes by the end of last year, or 37% of their CAF II commitment. The company says that their goal is to have 60% coverage by the end of this year. CenturyLink is primarily upgrading rural DSL, although they’ve said that they are considering using point-to-multipoint wireless for the most rural parts of the coverage areas. The company reports that in the upgrades so far that 70% of the homes passed so far can get 20 Mbps download or faster.

Frontier. The last major recipient of CAF II funding is Frontier. The company originally accepted $283 million per year to upgrade 650,000 passings. They subsequently acquired some Verizon properties that had accepted $49 million per year to upgrade 37,000 passings. That’s just under $2 billion in total funding.

FierceTelecom reported in January that Frontier reached 45% of the CAF II area with broadband speeds of at least 10/1 Mbps by the end of 2017. The company also notes that in making the upgrades for rural customers that they’ve also upgraded the broadband in the towns near the CAF II areas and have increased the broadband speeds of over 900,000 passings nationwide.

Frontier is also largely upgrading DSL, although they are also considering point-to-multipoint wireless for the more rural customers.

Other telcos also took major CAF II funding, but I couldn’t find any reliable progress reports on their deployments. This includes Windstream ($175 million per year), Verizon ($83 million per year), Consolidated ($51 million per year), and Hawaiian Telcom ($26 million per year).

The upcoming reverse auction this summer will provide up to another $2 billion in funding to reach nearly 1 million additional rural homes. In many cases these are the most remote customers, and many are found in many of the same areas where the CAF II upgrades are being made. It will be interesting to see if the same telcos will take the funding to finish the upgrades. There is a lot of speculation that the cellular carriers will pursue a lot of the reverse auction upgrades.

But the real question to be asked for these properties is what comes next. The CAF II funding lasts until 2021. The speeds being deployed with these upgrades are already significantly lower than the speeds available in urban America. A household today with a 10 Mbps download speed cannot use broadband in the ways that are enjoyed by urban homes. My guess is that there will be continued political pressure to continue to upgrade rural speeds and that we haven’t seen the end of the use of the Universal Service Fund to upgrade rural broadband.

Regulating From Broadband Maps

One of the more bizarre things we do in the US is regulate broadband based upon broadband maps. There are numerous federal grant and subsidy programs that rely upon these maps (and the underlying databases that support them) as well as various state programs. The FCC also uses this same data when reporting broadband penetration in the country to Congress each year, as just occurred on February 9.

The maps are intended to show how many households can purchase broadband of various speeds. Currently the arbitrary speed thresholds tested are download speeds of 10 Mbps, 25 Mbps and 100 Mbps. These speeds are measured due to past decisions by the FCC. For example, the FCC chose a 10/1 Mbps speed goal for any company that accepted CAF II money to upgrade rural broadband. The FCC’s current definition of broadband is still set at 25/3 Mbps.

Anybody that understands broadband networks knows that much of the data included in the databases and the mapping is incorrect, and sometimes pure fantasy. That makes sense when you understand that the speeds in this mapping process are all self-reported by ISPs.

There are numerous reasons why the speeds in these databases are not an accurate reflection of the real world:

  • There are still ISPs that report advertised speeds rather than actual speeds received by customers.
  • Any speeds represented for a whole DSL network are inaccurate by definition. DSL speeds vary according to the size of the copper wires, the condition of the copper cable and the distance from the source of the DSL broadband signal. That means that in a DSL network the speeds available to customers vary street by street, and even house by house. We’ve always known that DSL reported in the mapping databases is overstated and that most telcos that report DSL speeds report theoretical speeds. I’m not sure I blame them, but the idea of any one speed being used to represent the performance of a DSL network is ludicrous.
  • The speeds in the database don’t recognize network congestion. There are still many broadband networks around that bog down under heavy usage, which means evenings in a residential neighborhood. Nobody wants to be told that their network is performing at 10 Mbps if the best speed they can ever get when they want to use it is a fraction of that.
  • The speeds don’t reflect that ISPs give some customers faster speeds. In networks where bandwidth is shared among all users on a neighborhood node, if a few customers are sold a faster-than-normal speed, then everybody else will suffer corresponding slower speeds. Network owners are able to force extra speed to customers that pay a premium for the service, but to the detriment of everybody else.
  • The maps don’t reflect the way networks were built. In most towns you will find homes and businesses that were somehow left out of the initial network construction. For example, when cable companies were first built they largely ignored business districts that didn’t want to buy cable TV. There are lots of cases of apartment and subdivision owners that didn’t allow in the incumbent telco or cable company. And there are a lot of homes that just got missed by the network. I was just talking to somebody in downtown Asheville where I live who is not connected to the cable network for some reason.
  • Not all ISPs care about updating the databases. There are many wireless and other small ISPs that don’t update the databases every time they make some network change that affects speeds. In fact, there are still some small ISPs that just ignore the FCC mapping requirement. At the other extreme there are small ISPs that overstate the speeds in the databases, hoping that it might drive customer requests to buy service.
  • One of the most insidious speed issues in networks are the data bursts that many ISPs frontload into their broadband products. They will send a fast burst of speed for the first minute or two for any demand for bandwidth. This improves the customer experience since a large percentage of requests to use bandwidth are for web searches or other short-term uses of bandwidth. Any customer using this feature will obtain much faster results from a speed test than their actual long-use data speeds since they are actually testing only the burst speed. A rural customer using burst might see 4 Mbps on a speed test and still find themselves unable to maintain a connection to Netflix.
  • Sometimes there are equipment issues. The best-known case of this is a widespread area of upstate New York where Charter has kept old DOCSIS 1.0 cable modems in homes that are not capable of receiving the faster data speeds the company is selling. It’s likely that the faster network speed is what is included in the database, not the speed that is choked by the old modems.
  • And finally, speed isn’t everything. Poor latency can ruin the utility of any broadband connection, to the point where the speed is not that important.

Unfortunately, most of the errors in the broadband databases and maps overstate broadband speeds rather than under-report them. I’ve worked with numerous communities and talk to numerous people who are not able to get the broadband speeds suggested by the FCC databases for their neighborhoods. Many times the specific issue can be pinned down to one of the above causes. But that’s no consolation for somebody who is told by the FCC that they have broadband when they don’t.

3Q 2017 Broadband Growth

Last Friday’s blog asked if we are nearing the top of the market in terms of broadband penetration. Overall households with some sort of Internet connection have only grown from 83% in 2012 to 84% today, with most of the customers now served with a broadband connection instead of using slower dial-up or satellite. Following are the numbers showing the new broadband connections of the major ISPs during the recent third quarter of this year:

 2Q 2017 3Q 2017 Change
Comcast 25,306,000 25,519,000 213,000 0.8%
Charter 23,318,000 23,603,000 285,000 1.2%
AT&T 15,686,000 15,715,000 29,000 0.2%
Verizon 6,988,000 6,978,000 (10,000) -0.1%
CenturyLink 5,868,000 5,767,000 (101,000) -1.7%
Cox 4,845,000 4,860,000 15,000 0.3%
Frontier 4,063,000 4,000,000 (63,000) -1.6%
Altice 4,004,000 4,020,900 16,500 0.4%
Mediacom 1,185,000 1,194,000 9,000 0.8%
Windstream 1,025,800 1,017,400 (8,400) -0.8%
WOW 727,600 730,000 2,400 0.3%
Cable ONE 521,724 519,062 (2,662) -0.5%
Fairpoint 307,100 301,000 (6,100) -2.0%
Cincinnati Bell 304,193 307,900 3,707 1.2%
94,149,417 94,532,262 382,845 0.4%

These figures come from reports published each quarter by Leichtman Research Group. These large ISPs control over 95% of the broadband market in the country – so looking at them provides a good picture of the industry. Not included in these numbers are the broadband customers of the smaller ISPs, the subscribers of WISPs (wireless ISPs) and customers of the various satellite services. Cable companies still dominate the broadband market and have 60.4 million customers compared to 34.1 million customers for the big telcos.

What do these numbers tell us about broadband growth? If you take the numbers at face value, a growth of 0.4% for the quarter would extrapolate to an annual growth rate over 1.5%, and would suggest that the market is still growing. But is it?

Within these numbers are broadband customers from new housing units. The country is expected to add at least 1 million new homes and apartment units this year, and if the ISPs sell to 84% of them, then 210,000 of the new broadband customers are due to the new housing units and don’t represent an increase in overall market penetration rate for the sector.

Further, we are now in the second year of the FCC’s CAF II program. The telcos in the above list are being given over $8 billion over six years (and 2017 is the second year) to bring broadband to over 5 million rural households. By now these funds should be adding new broadband customers for CenturyLink, AT&T, Frontier, etc. I haven’t seen any reports yet from the FCC quantifying the customer added as a result of CAF II, but it’s not hard to think this won’t mean something like 175,000 new broadband customers per quarter over the last five years of the program.

Assuming that CAF II customers are now coming on board, then the whole industry growth can be attributed to either broadband for new housing units or new rural households getting broadband for the first time. And that would validate that the broadband industry is not growing much otherwise.

The numbers also tell us a few more things. For example, in urban areas the cable companies are still wooing away DSL customers. But even that is slowing down. Cable company customer additions for the 3Q are 540,000, down from 780,000 a year ago. For the first three quarters of 2017 combined the cable companies have added about 2 million customers while the telcos have lost 430,000 broadband customers.

Are We at the End of Broadband Growth?

A recent report by the Leichtman Research Group looks at overall historic broadband penetration rates. In looking at the results I immediately asked the question if we have topped out with US broadband penetration rates.

The study shows that 82% of homes now have a home broadband connection. Another 2% of homes get an Internet connection from other source like dial-up or satellite, meaning that the overall number of households with some kind of home broadband connection is 84%.

But compare that to 2012. In that year 76% of homes had a home broadband connection while 7% got broadband in some other matter – a total market penetration in 2012 of 83%. This means that the composite growth of homes that have added broadband from 2012 until now is only 1% (84% compared to 83%)

During that time the big ISPs have all continued to show broadband growth. But these numbers show that the growth of broadband came from customers dropping dial-up or other slower forms of broadband.  But the big question that is raised is if the 84% overall Internet connectivity is close to a full penetration rate. If so this raises significant questions about the future of the ISP industry.

The report does suggest that there is possibly more room for industry growth – but only if we can find a way to solve the digital divide. The report shows that 91% of homes with household income above $50,000 have landline broadband compared to only 72% for homes making less than $50,000. That would suggest that the overall demand for broadband is probably closer to the 91% experienced by higher-income homes.

Numerous surveys have shown that low income homes without broadband have always cited high prices as the reason they don’t have broadband. It possible that the broadband penetration for lower-income homes might drop as the telcos begin the promised phase-out of DSL, which generally has been the low-cost broadband alternative in most markets. But these numbers also suggest that an ISP that can profitably offer a low-cost broadband alternative might have a sizable potential market.

Finally, the study looks at cellular broadband. It shows that the percentage of households that sometimes use cellular data to connect to the Internet has grown from 44% in 2012 to 75% today. 68% of households today use both cellular and landline Internet connections.

Other studies have shown that there is a small, but growing segment of the population that only uses cellular data. This tends to be younger people who value mobility over broadband speeds, or low-income households that can’t afford a landline alternative. To some extent the growth in the use of cellular broadband is probably at least partially responsible for holding down the overall growth of landline broadband connections. In economics terms there is some segment of customers that view cellular data as a reasonable substitute for landline broadband, and who are happy with only the cellular connection.

None of these numbers are a surprise to the big ISPs which track these statistics closely in each market. But the numbers are cause for alarm. Once the broadband market reaches full market penetration then there will be no overall growth in the industry in terms of adding net new broadband customers, at least beyond the rate of overall household growth.

The cable companies are still enjoying a boom related to their ability to convert customers from DSL. But the telcos have begun to fight back by building fiber-to-the-home. They are also planning to start deploying more fixed wireless connections using 5G. In at least some markets broadband is going to get a lot more competitive.

The overall broadband market is going to change and become more like any mature market when overall growth stops. This is pure economics. The market changes drastically if an ISP can only grow by taking customers away from other ISPs. We already know what that looks like by observing the marketing wars between the cellular carriers.

The Beginning of the End for Copper

The FCC voted last Thursday to relax the rules for retiring copper wiring. This change was specifically aimed at Verizon and AT&T and is going to make it a lot easier for them to tear down old copper wiring.

The change eliminates some of the notification process to customers and also allows the telcos to eliminate old copper wholesale services like resale. But the big consequence of this change is that many customers will lose voice services. This change reverses rules put in place in 2014 that required that the telcos replace copper with service that is functionally as good as the copper facilities that are being removed.

Consider what this change will mean. If the telcos tear down copper in towns then customers will lose the option to buy DSL. While cable modems have clobbered DSL in the market there are still between 15% and 25% of broadband customers on DSL in most markets. DSL, while slower, also offers lower cost broadband options which many customers find attractive.

I don’t envision AT&T and Verizon tearing down huge amounts of copper in towns immediately. But there are plenty of neighborhoods where the copper is dreadful and the telcos can now walk away from that copper without offering an alternative to customers. This will give the cable companies a true monopoly in towns or neighborhoods where the copper is removed. Customers losing low-cost DSL will face a price increase if they want to keep broadband.

The rural areas are a different story. In most of rural America the copper network is used to deliver telephone service and there are still a lot of rural customers buying telephone service. You might think that people can just change to cellular service if they lose their landlines, but it’s not that simple. There are still plenty of rural places that have copper telephone service where there is no good cellular service. And there are a lot more places where the cellular service is too weak to work indoors and customers need to go outside to find the cellular sweet spots (something we all remember doing in airports a decade ago).

Of a bigger concern in rural areas will be losing access to 911. A lot of homes still keep landlines just for the 911 capabilities. Under the old rules the carriers had to demonstrate that customers would still have access to reliable 911, but it seems the carriers can now walk away without worrying about this.

The FCC seems to have accepted the big telcos arguments completely. For instance, Chairman Pai cited a big telco argument that carriers could save $40 to $50 per home per year by eliminating copper. That may be a real number, but the revenue from somebody buying voice service on copper is far greater than the savings. It seems clear that the big telcos want to eliminate what’s left of their rural work force and get out of the residential business.

This is a change that has been inevitable for years. The copper networks are deteriorating due to age and due even more to neglect. But the last FCC rules forced the telcos to work to find an alternative to copper for customers. Since AT&T and Verizon are cellular companies this largely meant guaranteeing adequate access to cellular service – and that meant beefing up the rural cellular networks where there aren’t a lot of customers. But without the functional equivalency requirement it’s unlikely that the carriers will beef up cellular service in the most remote rural places. And that means that many homes will go dark for voice.

This same ruling applies to other telcos, but I don’t think there will be any rush to tear down copper in the same manner as AT&T and Verizon. Telcos like Frontier and Windstream still rely heavily on their copper networks and don’t have a cellular product to replace landlines. And I don’t know any smaller telcos that would walk away from customers without first providing an alternative service.

It’s hard to think that the FCC is embracing a policy that will leave some households with no voice option. The FCC is purposefully turning a blind eye to the issue, but anybody who knows rural America knows this will happen. There are still a lot of rural places where copper is the only communications option today. Our regulators once prided themselves on the fact that we brought telephone service to every place that had electricity. We had a communications network that was the envy of the world, and connecting everybody was a huge boon to the economy. We could still keep those same universal service policies for cellular service if we had the will to do so. But this FCC clearly sides with the big carriers over the public and they are not going to impose any rules that the big telcos and cable companies don’t want.

A Doubling of Broadband Prices?

In what is bad news for consumers but good news for ISPs, a report by analyst Jonathan Chaplin of New Street Research predicts big increases in broadband prices. He argues that broadband is underpriced. Prices haven’t increased much for a decade and he sees the value of broadband greatly increased since it is now vital in people’s lives.

The report is bullish on cable company stock prices because they will be the immediate beneficiary of higher broadband prices. The business world has not really acknowledged the fact that in most US markets the cable companies are becoming a near-monopoly. Big telcos like AT&T have cut back on promoting DSL products and are largely ceding the broadband market to the big cable companies. We see hordes of customers dropping DSL each quarter and all of the growth in the broadband industry is happening in the biggest cable companies like Comcast and Charter.

I’ve been predicting for years that the cable companies will have to start raising broadband prices. The companies have been seeing cable revenues drop and voice revenues continuing to drop and they will have to make up for these losses. But I never expected the rapid and drastic increases predicted by this report. Chaplin sets the value of basic broadband at $90, which is close to a doubling of today’s prices.

The cable industry is experiencing a significant and accelerating decline in cable customers. And they are also facing significant declines in revenues from cord-shaving as customers elect smaller cable packages. But the cable products have been squeezed on margin because of programming price increases and one has to wonder how much the declining cable revenue really hurts their bottom line.

Chaplin reports that the price of unbundled basic broadband at Comcast is now $90 including what they charge for a modem. It’s even higher than that for some customers. Before I left Comcast last year I was paying over $120 per month for broadband since the company forced me to buy a bundle that included basic cable if I wanted a broadband connection faster than 30 Mbps.

Chaplin believes that broadband prices at Comcast will be pushed up to the $90 level within a relatively short period of time. And he expects Charter to follow.

If Chaplin is right one has to wonder what price increases of this magnitude will mean for the public. Today almost 20% of households still don’t have broadband, and nearly two-thirds of those say it’s because if the cost. It’s not hard to imagine that a drastic increase in broadband rates will drive a lot of people to use broadband alternatives like cellular data, even though it’s a far inferior substitute.

I also have to wonder what price increases of this magnitude might mean for competitors. I’ve created hundreds of business plans for markets of all sizes, and not all of them look promising. But the opportunities for a competitor improve dramatically if broadband is priced a lot higher. I would expect that higher prices are going to invite in more fiber overbuilders. And higher prices might finally drive cities to get into the broadband business just to fix what will be a widening digital divide as more homes won’t be able to afford the higher prices.

Comcast today matches the prices of any significant cable competitor. For instance, they match Google Fiber’s prices where the companies compete head-to-head. It’s not hard to foresee a market where competitive markets stay close to today’s prices while the rest have big rate increases. That also would invite in municipal overbuilders in places with the highest prices.

Broadband is already a high-margin product and any price increases will go straight to the bottom line. It’s impossible for any ISP to say that a broadband price increase is attributable to higher costs – as this report describes it, any price increases can only be justified by setting prices to ‘market’.

All of this is driven, of course, by the insatiable urge of Wall Street to see companies make more money every quarter. Companies like Comcast already make huge profits and in an ideal world would be happy with those profits. Comcast does have other ways to make money since they are also pursuing cellular service, smart home products and even now bundling solar panels. And while most of the other cable companies don’t have as many options as Comcast, they will gladly follow the trend of higher broadband prices.