CenturyLink Announces Data Cap Trials

centuryLinkIn a move that probably surprises nobody, CenturyLink said that they are going to start trials of data caps later this year. This was mentioned by Stewart Ewing, the company’s chief financial officer, during the last quarterly investor call.

I have to say that I am disappointed by the announcement because I guess part of me hoped that CenturyLink was somehow different than the rest of the giant ISPs. After all, they started out as a regional independent telephone company that did the right thing for customers far more often than not.

But this announcement clearly shows that they now think like a duopolist, and that they really won’t fully compete against the big cable companies. CenturyLink is in the process of building a significant amount of last mile fiber and they say they will pass over 700,000 homes by the end of this year. I was just in Tacoma where CenturyLink has already overbuilt fiber to a large portion of the city and it looks like they are doing just what they promised.

CenturyLink (and formerly Qwest) has fared extremely poorly with their DSL product in major markets. The cable companies have largely won the broadband battles in the cities and have the lion’s share of broadband customers. And now that the cable companies like Comcast are really stepping up the speeds they offer, one has to think that urban DSL has to be in its dying days. It’s hard to imagine customers that will pay for a DSL connection that can get 15 Mbps or a lot less when for the same price they can get something far faster from the cable company.

So now CenturyLink is building fiber and this puts them back in the game and ahead of the cable companies again. One would think that CenturyLink would take advantage of Comcast’s data caps and advertise against them as a way to win quick market share. After all, once they have sunk money into a new fiber network, profitability becomes all about gaining as many customers as possible.

But instead CenturyLink is acting like a duopolist and will probably match Comcast’s data caps. I know that they will claim that this is only a trial of data caps, which is the same thing that Comcast is saying. But the lure of the extra revenues from data caps is just too attractive to all the big carriers.

Unfortunately, the big telcos and cable companies are almost all publicly traded companies. As such they are under tremendous pressure from Wall Street to show increased revenues and increased earnings year after year and quarter after quarter. This is getting harder and harder for these companies to do. For the last decade the big carriers have thrived from the ever-growing number of broadband customers. But it appears that overall growth of broadband customers is nearing an end. Several recent polls suggest that everybody that can afford broadband now has it. There is only a small percentage of households that don’t want broadband, but everybody else either has it or can’t afford it at the big company prices.

And so if broadband customers aren’t going to keep growing, and if cable TV and telephone customers are falling, then a big ISP only has a few places to go for revenue to continue to please Wall Street. Comcast is exploring a few new areas such as selling security, home automation and even cellular service. But it’s hard to think that those revenues will be enough to replace the torrid historical pace of broadband revenues and margins gained over the last decade. This means that the only realistic place for future revenue growth has to be from broadband.

That means raising the broadband rates every year, but it also means implementing tight data caps to be able to penalize people who actually use the broadband they buy. It’s clear that this is where Comcast is headed. A part of me hoped that companies like CenturyLink would not drink the same kool-aid and that they might just be happy taking the many disgruntled customers from the cable companies. But I guess that any duopolist has a hard time not doing what comes naturally. I fear we will have cities that finally have what everybody has always hoped for – a fast cable network competing against a fiber network – and yet there still will not be any real price competition.

Is the FCC Squelching Web Innovation?

FCC_New_LogoI am always intrigued when politics enters the telecom realm, because the vast majority of issues we wrangle with are still handled in the traditional way. Engineers innovate and regulators regulate and generally, in the telecom world, the best technical solutions have always made it to the top and good ideas have generally won their way to the market.

Recently there was a guest editorial written for Forbes by Senator Steve Daines of Montana and FCC Commissioner Michael O’Reilly. This editorial took the FCC to task for squelching innovation by creating what they called a ‘permissionless culture’ of overregulation that is stopping innovation from happening on the web. The editorial goes on to talk about how web innovation has created a trillion dollar annual economy in the US and praises such ventures as Uber, Facebook and the iPhone. They go on to talk about how companies like GroupMe didn’t require any regulatory approval to try new ideas.

What seems to have them incensed is that the FCC recently called in Comcast, AT&T and T-Mobile to talk about each of their zero-rating schemes where they favor certain content by not making it part of their data caps. And this is where their analogy starts to break apart. It starts looking like a stretch to me to call Comcast or AT&T innovators. Comcast and the other large cable companies are very close to being broadband monopolists in the vast majority of their markets, and are at best a duopolist in other markets. AT&T and T-Mobile are two of only four wireless companies with any national reach in a market that is clearly an oligopoly.

If the FCC isn’t supposed to regulate the monopolists, duopolists and oligopolists then who are they supposed to regulate? It’s clear these two guys don’t like net neutrality, and probably not regulation in general. It also seems a bit extraordinary to me to see a sitting FCC Commissioner so heavily lobbying against his own agency in public.

The key accusation they have made is that the FCC is somehow stopping innovation by discussing net neutrality with these three large carriers. Is there any chance that they are?

I think it’s a huge stretch to compare Comcast and AT&T to GroupMe and the iPhone. The particular issues that prompted the editorial are essentially billing issues and these carriers aren’t being innovative and haven’t created anything new with zero-rating.

The huge number of filed comments in the net neutrality case made it very clear that the innovators in Silicon Valley are worried about the power of carriers like Comcast and AT&T. They fear that those companies who act as the ISP for most Americans can pick winners and losers among the GroupMe’s of the world by favoring a handful of large established web companies over everybody else. Those comments made it clear that the people who are the actual innovators want the FCC to insure that new web companies and new ideas be given a fair chance in the marketplace.

And so this is where politics enters the argument. Probably one of the oldest techniques used in politics is to call something the opposite of what it really is. Do that loudly enough and often enough and many people will start believing the opposite of what is really true.

In this case the FCC is doing exactly what it is supposed to do. They haven’t taken any actions yet, but they might. They are looking into whether the various zero-rating schemes of these three companies are anti-competitive. There is no guarantee on what they will decide since the three companies are trying different ideas. But what is clear is that companies like these three have the power to pick winners and losers among web content providers.

I find it disingenuous to be calling the FCC anti-competitive and accusing them of squelching competition when the FCC is investigating companies that actually have the power to do exactly that. I guess these kinds of editorials are written to stir up people outside of the telecom industry, because I suspect most industry insiders understand the issue clearly and just shake their heads when politics enters our universe.

Why Regulate Broadband?

FCC_New_LogoOften lost in the discussion of how much the big ISPs in the country hate Title II regulation of broadband is the more general discussion of whether the broadband market ought to be regulated. When I first entered the industry telephone service was heavily regulated in almost every manner imaginable, and this was due to the gigantic monopoly power of AT&T at the time. Over the years various parts of the telephone industry have become lesser regulated or even deregulated. And somehow during this process we seem to have gotten used to the idea that communications services are best when deregulated.

But I want to step back to a general discussion about regulation in general. Governments tend to regulate industries for several different reasons. For example, there is generally regulation of the financial industry because failures of large banks can devastate the rest of the economy. We also regulate businesses that can harm people, and so we do things like inspect food or have rules about transporting dangerous chemicals.

And finally, we regulate companies that provide services that most people need and for which a given provider can hold huge power over customers by nature of being a monopoly. This is why we regulate electric and water companies – because they tend to be natural monopolies in a given market. And it’s why we used to regulate Ma Bell.

When broadband first became a product there was no discussion of regulating it because it didn’t appear at the time that there were going to be monopoly providers. In the dial-up days there were all sorts of new companies like AOL and Compuserve entering the market. And then along came faster broadband and the cable companies and the telcos launched new and faster broadband products at almost the same time. It looked like there would be vigorous competition between DSL and cable modems.

But in the few decades since then it’s become obvious that cable modems have won that battle. Cable companies are growing to the point in many markets of having a virtual monopoly since the DSL products are too slow to keep pace. Every quarter when broadband customers are announced by all of the big companies it’s obvious that there are still people flocking from DSL to cable modems. It’s been clear for some time that broadband, which has largely been a duopoly market, is trending towards monopoly as DSL fades.

The other test that regulators use when considering regulation is if there is any effective substitute for the monopoly products or services. Cable companies argue that cellular wireless data and fiber are both effective substitutes for cable modem. But are they really?

I’ve written a number of times about how lousy cellular wireless is as a competitor to landline broadband. While there are certainly people who are satisfied with only a cellular data connection, the bandwidth and pricing of cellular data make it a poor second cousin to landline data, and most cellphone users seek out WiFi rather than rely solely on cellular data. And while there is talk about going to 5G and gigabit wireless networks, this talk is still almost all hype.

There are certainly markets where fiber is a good competitor for cable modems. But the other day I looked at the list of the 200 largest cities in the country and the majority of cities on that list do not have fiber and are not on anybody’s list to bring fiber. And even where there is some fiber there are no large markets where there is fiber everywhere in a city – ask all of the eastern cities how they feel about how Verizon built FiOS to only parts of their cities. Further, the cable companies are all implementing DOCSIS 3.1 which is going to give cable systems the ability to keep up with fiber speeds for the next decade.

And even where somebody builds fiber, at best we end up in a duopoly situation. When you look at where Google has brought fiber it looks to me like most of the competition is with data speeds and not with prices. If anything, the average price paid for broadband is higher where Google has built fiber.

It’s obvious that Comcast doesn’t think there is any effective competition as witnessed by their trial with data caps, which everybody expects to go nationwide soon. Their data caps are going to mean a big rate increase for a lot of customers, something that could never happen in a competitive market.

So, when looked at from a regulatory perspective, the broadband market is ripe for regulation. In fact, it probably should have been regulated much sooner. I see nothing on the horizon that is going to improve broadband choice for the vast majority of Americans and I hope the FCC can find a way to put some teeth in the way they regulate broadband.