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.

Selling Wholesale 5G

Frontier announced the other day that it was interested in selling off much of the Verizon FiOS networks it had recently acquired in 2016. Apparently, the company is over-leveraged and needs the cash to make a healthier balance sheet. But regardless of the reason, that puts a sizable pile of last mile fiber networks onto the market.

I read a summary of a report by Cowan Equity Research that suggests that there is increasing value for fiber networks now based upon the potential for selling wholesale connections to 5G providers. As I think about this, though, I’m betting that a lot of fiber network owners will be extremely leery about allowing 5G providers onto their networks.

Without looking at the Frontier specifics, consider an existing last mile fiber network that already passes all, or nearly all of the homes and businesses in a community. Every fiber business plan I’ve ever created shows that any last mile fiber network requires a substantial customer penetration in order to be financially viable. The smaller the footprint of the network, the higher the needed customer penetration rate.

Consider how a 5G provider would gain access to an existing fiber network. They’d want to gain access for each 5G transmitter and would pay some fee per unit, or else a fee to lease the whole network. That fee would have to be low enough for the 5G provider to make a profit when selling broadband. I’m guessing that the Cowan group assumes this will provide an attractive second revenue stream for an existing fiber network.

That assumption ignores the fact that the 5G company will be competing directly against the fiber owner for retail broadband customers. It’s not hard for me to envision a scenario where the fiber network owner will lose margin by this transaction. They will be trading high margin retail customers for low-margin 5G wholesale connections.

I saw one market analyst that guessed that a Verizon 5G gigabit offering would capture 30% of the customers in a market. The only way for that to happen would be for the 5G provider to take a big chunk out of the customer base of both the incumbents in the market as well as the fiber owner.

There are markets where selling wholesale 5G might be a good business plan. For example, I’ve seen speculation that Google Fiber and other large overbuilders hope to achieve a 30% market share in large NFL-sized cities. I could foresee a scenario where Google Fiber might increase profits by offering both retail broadband and wholesale 5G connections.

But in smaller markets this could be a disaster. If the fiber network is in a smaller town of 50,000 people, the existing fiber network might need a 45% or 50% customer penetration to be profitable. It’s not hard imagining a 5G scenario that could drive the network owner out of business through loss of higher-margin retail customers. I can’t see why owners of fiber networks in smaller markets would allow a direct competitor onto their network. While the new source of 5G revenue sounds enticing, the losses from retail margins could more than offset any possible gains from the wholesale 5G revenues.

The Frontier example offers yet another possibility. Verizon is famous for cherry-picking with its fiber networks. They will build to one street and not to the one next door. They will build to one apartment or subdivision but not the one next door. Verizon seems to have stayed very disciplined and built only to those places where the cost of construction met their construction cost criterion. I could foresee somebody owning a cherry-picking network to leverage it to get to the homes that are not directly on the fiber routes. We still don’t yet understand the factors that will determine who can or cannot be served from a 5G network, but assuming that such a network will extend the effective reach of fiber this seems like a possible business plan.

But there are fiber networks owned by telcos, municipalities and fiber overbuilders that might look at the math and decide that having a 5G provider on their network is a bad financial idea. I have a difficult time thinking that cable companies will allow 5G competitors access to fiber that’s deep in residential neighborhoods. My gut tells me that while Wall Street foresees an opportunity, this is going to be a lot harder sell to fiber owners than they imagine.

Big ISPs Raise Broadband Prices

As the new year dawns we are starting to see big ISPs raise broadband prices. One of the more interesting increases is by Comcast. They increased two rates – the rate of standalone broadband and the price of renting a cable modem.

The company now charges $75 per month for a standalone broadband connection that meets the FCC’s definition of broadband of being at least 25/3 Mbps. In many of their markets the minimum speed offered to new customers is faster than this, making the $75 entry price for standalone broadband.

For now it doesn’t look like Comcast increased the cost of bundled broadband, although they just announced that all bundled packages are increasing by $5 per month. But that increase can largely be attributed to increased programming costs. The price for standalone broadband was $65 a year ago, was raised by $5 during 2017 and just went up by $5 again.

The standalone price increase is aimed squarely at cord cutters. This price punishes customers who don’t want to pay for the other services in the various Comcast bundles. This is their way to still extract a lot of margin from somebody who elects to watch video online. I wrote a blog a few months ago that cited a Wall Street analyst that suggested that the company ought to charge $90 for standalone broadband, and it looks like the company is heeding that advice.

To put that price into perspective, Google Fiber and a few others are charging $70 for a standalone symmetrical gigabit connection – 20 times the speed for a lower price. But to really make a fair comparison you also have to consider the Comcast cable modem. They just raised that rate from $10 to $11 per month. The company makes it a challenger for customers who won’t use the Comcast modem, and so the real standalone price for the minimal Comcast broadband product is $86 per month.  It’s not hard to understand why households are beginning to find broadband unaffordable.

The $11 fee for a cable modem is outrageous. Comcast gets these directly manufactured and I am doubtful that they are spending more than $100 per device, and probably less. The $1 price increase adds roughly $300 million to Comcast’s bottom line. In total, the company is billing roughly $3.3 billion per year for all customers for an inventory of modems that probably costed them less than $2.5 billion. And since people tend to keep the modems for a number of years, this rate is mostly margin. Even for a new customer Comcast recovers the cost of the modem within 9 months.

Frontier also has introduced a troubling new price increase for broadband. Rather than increase the advertised price of the product they are adding a $1.99 per month ‘Internet Infrastructure Surcharge.’ This is strictly an increase in broadband rates, and the company is clearly hoping that most people don’t notice or don’t understand this new charge on their bill. For the last few years we have seen cable companies sneak in rates that look like taxes or external fees but which are just a piece of the cable TV bill. It’s disturbing to see this happening with broadband and I suspect other ISPs will begin copying this concept over the next few years.

Cox has also increased data prices, and unlike the above two companies which are trying to mask the broadband price increases, Cox raised all packages that include broadband from $2 to $4 per month.

Broadband prices have never been regulated. There was a minimal threat of price regulation under Title II authority at the FCC, but that’s now gone. I’ve seen a few articles blaming these latest price increases on the end of Title II regulation, but there has never been anything stopping an ISP from raising rates other than market forces. In fact, the FCC has never threatened to regulate broadband rates.

There are two real drivers of these and future broadband price increases. First, broadband is no longer growing explosively since most homes now have a broadband connection. And the publicly traded ISPs are feeling earnings pressure while the loss of cable TV and telephone customers leaves broadband as the only place to increase bottom line margins.

The second major factor is the absence of real broadband competition. In markets where a real competitor like Google shows up the big ISPs come close to matching the lower prices of the competitor. But as houses need faster broadband, the residual competitive pressure from DSL is waning, meaning that in most cities the cable companies are becoming a virtual monopoly. Big ISPs like Comcast will lower rates where they have a good competitor, but they are more than making up for it in markets where they have the only fast broadband.

One consequence of the kind of prices that Comcast is now charging is that, over time, they will induce more competitors to enter the market. But the only real threat on the horizon for the big cable companies is point-to-multipoint 5G. It will be interesting to see if that technology can really work as touted. If 5G is successful it will be interesting to see the pricing philosophy of the ISPs offering the service. They could price low like Google Fiber or else ride the coat strings of the cable companies with higher prices.

Bad Telecom Deals

FierceWireless recently published a short article listing the 10 worst telecom business moves of the last 10 years. And there are some clunkers on the list like Google’s purchase of Motorola, AT&T’s effort to buy T-Mobile and Time Warner Cable’s agreement to pay over $8 billion for the rights to broadcast the LA Dodgers.

One of the bad moves listed was Fairpoint’s purchase of Verizon’s customers and networks in Maine, New Hampshire and Vermont. Everything imaginable went wrong with that purchase that closed in 2007. The transition to Fairpoint was dreadful. There were numerous network outages as the cords were cut to the Verizon network. Customers lost email access. They couldn’t place long distance calls out of state and many couldn’t even call customer service. Customers abandoned the company in droves and in 2009 Fairpoint declared bankruptcy and recently sold the company to Consolidated.

There are other similar stories about companies that have bought large number of customers from the large telcos. Earlier this year there was reports of widespread customer dissatisfaction after Frontier bought a large swath of Verizon lines.

There are a number of lessons to be learned from the Fairpoint and similar transactions. First, it is exceedingly difficult to buy customers from the large telcos. The processes at the big companies are mind-numbingly complicated. I remember talking to a guy at AT&T years ago about the process of provisioning a new T1 to a customer. As we walked through the internal processes at the company I realized that nearly a dozen different departments at AT&T scattered across the country were involved in selling and connecting a single T1. It’s impossible for a new buyer to step into the middle of such complication – no matter what employees might come with the purchase of a property there will be numerous functions that the acquired folks don’t know how to do.

I recall helping a client buy a few exchanges from Verizon back in the 1990s. The buyer got literally zero records telling them the services that business customers were using. The buyer had to visit every business customer in the hopes of getting copies of bills, which were often undecipherable. I remember even years later that there were business customers that had working data circuits that the buyer didn’t entirely understand – they worked and their philosophy was to just never touch them.

The point of all of this is that the transition of a property from a big company always has major problems. No matter how long the transition process before conveying everything to the buyer, on the day the switch is thrown there are big holes. And this quickly leads to customer dissatisfaction.

The other issue highlighted by these transitions is that a buyer rarely has enough human resources ready to deal with the onslaught of problems that start immediately with the cutover. It can be massively time consuming to help even a single customer if you don’t have good enough records to know what services they have. Multiplying that times many customers spells disaster.

Not all sales of big telco properties are in massive piles and I’ve helped clients over the years to purchase smaller numbers of exchanges from the big telcos. I have several clients looking at potential purchases today, which highlights the other big problems with buying telco properties.

Today, any small buyer of a copper network probably only does so with a plan to convert the new acquisition to fiber-to-the-home. The condition of acquired copper plant is generally scarily bad. I can remember that Verizon let it be known for at least fifteen years that the whole state of West Virginia was for sale before Frontier finally bought it. Industry folks all knew that during that whole time that Verizon had largely walked away from making any investments in the state or even doing anything beyond putting band-aids on maintenance problems. Frontier ended up with a network that barely limped along.

So a buyer has to ask how much value there really is in a dilapidated copper network. If a buyer spends ‘market’ rates to buy a telco property and then spends again to upgrade the acquisition they are effectively paying for the property twice. I’ve crunched the numbers and I’ve never been able to find a way to justify this.

I think we may have reached the point where existing copper networks have almost zero market value. Even with paying customers, the revenues generated from older copper networks are not high enough to support buying the exchange and then spending again to upgrade it. This is something that prospective buyers often don’t want to hear. But as I always advise, numbers don’t lie, and it’s become obvious to me that it’s not a good economic deal to invest in old copper networks. It usually makes more sense to instead overbuild the property and take the customers.

Where’s the Top of the Broadband Market?

Last week I looked at the performance of the cable TV industry and today I’m taking a comparative look at broadband customers for all of the large ISPs in the country. Following are the comparative results comparing the end of 2Q 2017 to 2Q 2016.

2017 2016 Change
Comcast 25,306,000 23,987,000 1,319,000 5.5%
Charter 23,318,000 21,815,000 1,503,000 6.9%
AT&T 15,686,000 15,641,000 45,000 0.3%
Verizon 6,988,000 7,014,000 (26,000) -0.4%
CenturyLink 5,868,000 5,990,000 (122,000) -2.0%
Cox 4,845,000 4,745,000 100,000 2.1%
Frontier 4,063,000 4,552,000 (489,000) -10.7%
Altice 4,004,000 4,105,000 (101,000) -2.5%
Mediacom 1,185,000 1,128,000 57,000 5.1%
Windstream 1,025,800 1,075,800 (50,000) -4.6%
WOW 727,600 725,700 1,900 0.3%
Cable ONE 521,724 508,317 13,407 2.6%
Fairpoint 307,100 311,440 (4,340) -1.4%
Cincinnati Bell 304,193 296,700 7,493 2.5%
94,149,417 91,894,957 2,254,460 2.5%

All of these figures come from reports published each quarter by Leichtman Research Group. Just like with cable subscribers, these large companies control over 95% of the broadband market in the country – so looking at them provides a good picture of all broadband. 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. It’s always been fuzzy about how MDUs are included in these numbers. The MDUs served by the major ISPs above are probably counted fairly well. But today there are numerous MDU owners who are buying a large broadband pipe from a fiber provider and then giving broadband to tenants. These customers are a growing demographic and are likely not included accurately in these numbers.

One of the biggest stories here is that the overall market is still growing at a significant rate of almost 2.5% per year. A little over half of the growth is coming from sales of broadband to new housing units. In the last year, with a good economy the country added almost 1.5 million new living units. But there are obviously still other homes buying broadband for the first time.

There has been a debate for years in the country about where the broadband market will top out. Those that don’t have broadband today can be put into four basic categories: 1) those that can’t afford broadband, 2) those that don’t want it 3) those that are happy with a substitute like cellular broadband, and 4) those who have zero broadband available, such as much of rural America.

It’s obvious that cable companies are outperforming telcos and Comcast, Charter and Mediacom gained more than 5% new broadband customers over the last year. But compared to more recent years the telcos have largely held their own, except for Frontier – which had numerous problems during the year including a botched transition for customers purchased from Verizon.

There are a number of industry trends that will be affecting broadband customers over the next few years:

  • We should start seeing rural customers getting broadband for the first time due to the FCC’s CAF II program. We are now in the third year of that program. The number of customers could be significant and CenturyLink estimates it will get at least a 60% penetration where it is expanding its DSL. I have seen reports from all over the country of fixed cellular wireless customers being connected by AT&T and Verizon.
  • The introduction of ‘unlimited’ cellular plans ought to make cellular broadband more attractive, at least to some demographics. While not really unlimited, the data caps of 20 GB or more per month are a huge increase over data caps from prior years.
  • There are almost a dozen companies that have filed requests with the FCC to launch new broadband satellites. The first major such launch was done recently by ViaSat which will use the new satellite to beef up its Excede product. There’s no telling how many of the other FCC filings represent real satellites or just vaporware, but there should be more competition from satellites, particular those that launch in low orbits to reduce the latency issue. The really big unknown is if Elon Musk will be able to launch the massive satellite network he has promised.
  • Lifeline programs. Companies like Comcast and AT&T have quietly launched low-price broadband options for low-income homes. The companies don’t advertise the plans broadly, but there are communities where significant numbers of customers have been added to these programs.

Industry Shorts, June 2017

Following are some topics I found of interest but which don’t justify a whole blog.

Amazon Bringing Alexa to Settop Boxes. Amazon has created a develop kit that would allow any settop box maker to integrate their voice service Alexa. The Alexa voice platform is currently supporting the popular Echo home assistant device. It’s also being integrated into some new vehicles and Amazon has made it available for integration into a whole range of home automation devices. The Amazon Alexa platform is currently ahead of the competitors at Apple, Google and Microsoft mostly due to having made the product open to developers who have already created over 10,000 applications that will work on the platform. Adding Alexa to a settop box could make it a lot easier to use the settop box as the hub for a smart home.

Comcast Tried to Shut Down anti-Comcast Website. LookingGlass Cyber Security Center, a vendor for Comcast, sent a cease-and-desist letter to the advocacy group Fight for the Future. This group is operating a website called comcastroturf.com. The advocacy group claims that Comcast has used bots to generate over a half million fake filings to the FCC in the network neutrality docket. These comments were all in favor of killing net neutrality and the group claims that Comcast used real people’s names to sign the filings, but without their permission. The website allows people to see if their name has been used. The cease-and-desist order was withdrawn after news of it got a lot of coverage in social media.

Net Neutrality Wins in Court. Not that it probably makes much difference now that the FCC is trying to undo Title II regulation, but the challenge filed by Verizon and other large ISPs against the FCC’s net neutrality decision was rejected at appeal. This affirms the ability of the FCC to use Title II rules for regulating broadband. The full U.S. Court of Appeals for the D.C. Circuit upheld an earlier court ruling that affirmed the FCC had the needed authority to implement the net neutrality decision.

Altice Buys Ad-Tech Company. Altice joins other big ISPs that want to take advantage of the end of the new FCC rules that allows ISPs to monetize customer’s private data. Altice, which is now the fourth largest US cable company after the acquisition of Cablevision, now joins the other big ISPs who have added the expertise to slice and dice customer data. Altice paid $300 million for Teads, a company specializing in targeting advertising based upon customer specific data.

Other large ISPs are already poised to take advantage of the new opportunity. For example, Verizon’s purchase of AOL and Yahoo brings this same expertise in-house. It has been widely speculated that the ISPs have been gathering customer data for many years and so are sitting on a huge treasure trove detailing customers web browsing usage, on-line purchasing habits, email and text information, and for the wireless ISPs the location data of cellphones.

Charter Rejects $100 Billion offer from Verizon. The New York Post reported that Charter rejected a purchase offer from Verizon. The Post reports that Charter thought the offer wasn’t high enough. It also came with some tax implications that would complicate the deal. Whether this particular offer is real or not, it points to the continuing consolidation of the industry ISPs, cable providers and cellular companies. The current administration is reportedly not against large mergers, so there’s no telling what other megadeals we might see over the next few years.

Top 7 Media CEOs made $343.8 Million in 2016. The CEOs of CBS, Comcast, Discovery Communications, Disney, Fox, Time Warner and Viacom collectively made a record salary last year, up 21.1% from 2015. It’s interesting in a time when the viewership of specific cable networks is dropping rapidly that the industry would be rewarding their leaders so handsomely. But all of these companies are compensating for losses of customers with continuing rate hikes for programming and most are having banner earnings.

Frontier Lays Off WV Senate President. Frontier just laid off Mitch Carmichael, the President of the Senate in West Virginia. This occurred right after the Senate passed a broadband infrastructure bill that was aimed at bringing more broadband competition to the state. The bill allows individuals or communities to create broadband cooperatives to build broadband infrastructure in areas with poor broadband coverage. Frontier is the predominant ISP in the state after its purchase of the Verizon property there. The West Virginia legislature is a part-time job that pays $20,000 per year and most legislators hold other jobs. West Virginia is at or near the bottom in most statistics concerning broadband speeds and customer penetration rates.

Latest Industry Statistics

The statistics are out for the biggest cable TV and data providers for the first quarter of the year and they show an industry that is still undergoing big changes. Broadband keeps growing and cable TV is starting to take some serious hits.

Perhaps the most relevant statistic of all is that there are now more broadband customers in the country than cable TV customers. The crossover happened sometime during the last quarter. This happened a little sooner than predicted due to plunging cable subscribers.

For the quarter the cable companies continued to clobber the telcos in terms of broadband customers. Led by big growth in broadband customers at Comcast and Charter the cable companies collectively added a little over 1 million new broadband customers for the quarter. Charter led the growth with 458,000 new broadband subscribers with Comcast a close second at 430,000 new customers.

Led by Frontier’s loss of 107,000 broadband customers for the quarter the telcos collectively lost 45,000 net customers for the quarter. Most of Frontier’s losses stem from the botched acquisition of Verizon FiOS properties. Verizon lost 27,000 customers for the quarter while AT&T U-verse was the only success among telcos adding 90,000 new customers for the quarter.

Looking back over the last year the telcos together lost 727,000 broadband customers while the cable companies together gained 3.11 million customers during the same period. The cable companies now control 63.2% of the broadband market, up from 61.5% of the market a year ago.

Overall the broadband market grew by 2.38 million new broadband subscribers for over the last year ending March 31. It’s a market controlled largely by the giant ISPs and the largest cable companies and telcos together account for 93.9 million broadband subscribers.

Cable TV shows a very different picture. The largest seven cable providers collectively lost 487,000 video subscribers for the quarter. That includes AT&T losing 233,000, Charter losing 100,000, Dish Networks losing 143,000, Verizon losing 13,000, Cox losing 4,000 and Altice losing 35,000. The only company to gain cable subscribers was Comcast, which gained 41,000.

Total industry cable subscriber losses were 762,000 for the quarter as smaller cable companies and telcos are also losing customers. That is five times larger than the industry losses of 141,000 in the first quarter of last year. This industry is now losing 2.4% of the market per year, but that r is clearly accelerating and will probably grow larger. The annual rate of decline is already significantly higher than last year’s rate of 1.8%.

At this point it’s clear that cord cutting is picking up steam and this was the worst performance ever by the industry.

The biggest losers have stories about their poor performance. Charter says it is doing better among its own historic customers but is losing a lot of customers from the Time Warner acquisition as Charter raises rates and does away with Time Warner promotional discounts. AT&T has been phasing out of cable TV over its U-Verse network. This is a DSL service that has speeds as high as 45 Mbps, but which is proving to be inadequate to carry both cable TV and broadband together. Dish Networks has been bogged down in numerous carriage and retransmission fights with programmers and has had a number of channels taken off the air.

But even considering all of these stories it’s clear that customers are leaving the big companies. Surveys of cord cutters show that very few of them come back to traditional cable after cutting the cord after they get used to getting programming in a different way.

What is probably most strikingly different about the numbers is that for years the first quarter has performed the best for the cable industry, which in recent years has still seen customer gains even while other quarters were trending downward. We’ll have to see what this terrible first quarter means for the rest of 2017.

 

 

What Happens to Unused CAF II Funds?

Fiber CableI look around rural America and I see fiber projects being proposed or built in a lot of places by small companies. Some of these are new initiatives like the new RS Fiber Cooperative that is underway in Sibley and Renville counties in Minnesota. And a lot of these new projects are being built by rural telcos and telephone cooperatives into areas adjacent to where they have always served.

While these small companies are building fiber the FCC is giving nearly $9 billion to the largest telephone companies to expand rural broadband. This was done under a program called CAF II that is part of the Universal Service Fund. The largest recipients of the funding are CenturyLink, Frontier and AT&T.

The CAF II funding has embarrassingly modest goals and only requires that the money be used to bring rural broadband speeds up to 10 Mbps download and 1 Mbps upload. The big telcos have a very relaxed six years to get this done. The telcos are mostly going to accomplish this by extending fiber from rural towns, into the country to support rural DSL.

I’m sure since most of my readers are knowledgeable about broadband that they realize how pathetically slow the 10 Mbps goal is. Already today 10 Mbps is not really broadband, even by the FCC’s own definition. A household that gets upgraded to 10 Mbps is probably going to be happy to get off dial-up, but they will soon realize that they are still far worse off than most of the rest of the country.

And while 10 Mbps is slow at today’s demand it’s been clear for decades that household demand for broadband has been doubling about every three years, back to the earliest days of the slowest dial-up. The folks at the tail-end of the six-year upgrades are going to be two more doublings of demand behind, meaning that in six years that 10 Mbps will feel basically four times worse than it does today.

In looking around at rural fiber projects I see fiber being built in areas where the telcos are going to get the CAF II subsidies. I wonder what will happen to the CAF II funding being used for those areas? Will the large telcos build DSL anyway even though nobody is going to buy it? Or will they just pocket the federal money and do nothing in those areas?

I don’t see anything in the CAF II rules that makes the large telcos give back any of the money, and so I suppose they will just keep it. This whole program is one of the worst uses of public funding I have ever seen. It’s easy to imagine the hundreds of rural fiber projects this money could have seeded. But instead the big telcos will be building DSL and will likely be loading up the claimed costs of the upgrades so they can get by with the least amount of actual upgrades possible.

Since the telcos already own wires in the places that will get upgraded they will be able to build fiber by overlashing. That is a process of tying fiber to existing copper lines and was the primary technique used by Verizon to build their FiOS fiber network. Overlashing is the lowest cost method of fiber construction and shouldn’t cost more than $15,000 to $20,000 per mile. If the whole $9 billion was used to build fiber that would mean building between 450,000 and 600,000 road miles of fiber. Wikipedia says that the US has less than 3 million miles of roads in the US including city streets, so this money could bring fiber to a significant percentage of rural areas. Of course, probably half of the money needs to be used for electronics, but that still means that the telcos ought to be using the CAF II money to build more than 200,000 miles of rural fiber.

If this money had instead been used to seed fiber innovators it could have brought fiber to millions of rural customers. If used as matching grants the $9 billion could have been leveraged to build $40 billion or $50 billion of rural fiber. Instead, every place that gets upgraded to the slow DSL is still going to need fiber and, for all practical purposes will be no closer to a true broadband solution than they are today.

New Skinny Bundles on the Horizon

television-sony-en-casa-de-mis-padresAll of a sudden I am seeing the term skinny bundle all over industry press. The term refers to web video programming offered by a company that is already somehow in the telecom business, with the inference that it’s probably only available to their own customers. The line between skinny bundles and OTT programming like Netflix is likely to get blurred over the next year as a few of the skinny bundle providers make their packages available to everybody.

It seems like all of the largest cable companies and telcos either have skinny bundles or are working on them. In a recent blog I talked about the Comcast skinny bundle they are calling Stream TV. It’s a lineup containing mostly major network channels plus HBO. It’s likely to be controversial because Comcast wants to exclude usage on the bundle from any data caps while counting data usage for watching Netflix and other OTT offerings.

As has been anticipated since they bought DirecTV, AT&T plans to launch their skinny bundle in January. The company hasn’t released the details yet but recently gave some hints about what might be in it. For one thing, through DirecTV the company has the ability to air current season shows, including the latest episodes. AT&T may be offering different options to wireless and wireline customers. CEO Randall Stephenson was quoted recently saying that the bundle will “turn some heads”, but I guess we’ll have to wait until January to see what that means.

Their chief rival Verizon Wireless launched Go90 earlier this year. The package is an interesting mix that Verizon says is aimed at Millennials. Verizon describes the package as halfway between YouTube and Netflix. It has a lot of unique content produced by YouTube stars but also carries some traditional programming content. The service is currently free to Verizon wireless subscribers but is expected to soon have a premium tier.

On the landline side, Verizon offers a package called Custom TV. That bundle is sold in combination with 25 Mbps Internet service for $65 a month, and includes a lineup of about 35 channels plus a few additional add-ons options available. The package has been so popular that Verizon reports that one third of their new customers in the second quarter of this year opted for the skinny bundle. While Verizon says that might hurt revenue targets, they affirmed what many have thought in that they expect sales of skinny bundles to increase the bottom line. It makes sense that the skinny bundles, while smaller, are more profitable than the giant bundles of hundreds of channels.

CenturyLink has also announced that they will launch a skinny bundle in early 2016. They say that their main motivation is to sign up new customers without the need for a truck roll, and so they might offer both a skinny bundle as well as the full TV line-up over the web. This will save them on settop boxes and other costs associated with being a full-service video provider.

There are other companies also considering skinny bundles. For instance, Frontier has reported that they are talking to programmers about skinny bundle options. There was an announcement in October that Tim Warner Cable was trialing a skinny bundle but I haven’t seen any press on that since then. CEO Rob Marcus has been quoted several times in the last six months saying that he doesn’t think his customers are looking for a cheaper alternative.

We’ll have to wait a while to see what kind of interest the public has in the skinny bundles. The companies like Verizon that have already launched skinny bundles are not reporting customers counts for the new products, making it hard for the rest of the industry to understand the customer demand.

The skinny bundles are clearly an attempt to try to keep cord cutters on the big company networks. But just about all of these big companies publicly say that cord cutting is not a concern for them. There has to be some concern that offering smaller bundles will invite customers to downsize, but if what Verizon admits is true, it might be that there is more profit in skinny bundles than in the giant cable packages – in which case you can expect to see more skinny bundle options.

State Commissions and Broadband

California PUCFrontier and the California commission have been negotiating a deal that lays out the terms that will allow Frontier to buy a pile of California customers from Verizon. Basically, as will be detailed below, the CPUC will require Frontier to upgrade broadband for over a third of the customers it has in the state as part of the deal.

Occasionally, state commissions get the chance to come down on the side of broadband, mostly during these times of mergers, sales, and acquisitions. There are a handful of state commissions, such as California, New York, Illinois and a few others, that have always been aggressive in these circumstances. There are a whole lot of other commissions who seem to be friendlier to the big carriers and let these kinds of deals slide through without much comment.

It’s good to see commissions take an aggressive stand to improve broadband. But looking back on some similar past deals one has to wonder how effective such arrangements really are. For example, I recall an arrangement between the Pennsylvania commission and Verizon in 1993 that freed Verizon from rate-of-return regulation as long as Verizon would bring DSL to hundreds of rural communities. But Verizon never built that DSL and rural Pennsylvania today still has some of the worst broadband in the country.

There also have been deals made by other government entities and carriers that have not brought any results. For instance, dozens of eastern cities gave Verizon franchise agreements to sell cable TV for an agreement that the company would bring FiOS fiber to their whole city. Verizon never built that extra fiber in any of these communities and earlier this year finally admitted that it was never going to expand FiOS fiber any further.

The FCC just made a deal with AT&T to greatly expand their fiber product as part of the agreement to buy DirecTV. We’ll have to wait and see if the company meets this obligation, and most of the industry is still trying to figure out if AT&T is serious about fiber.

So these deals sound great, but one has to wonder how much teeth they have. In this case, if Frontier doesn’t come through over time it’s not like the California commission can undo the purchase of the Verizon properties. There really is not a lot that any regulatory commission can do these days with a carrier that chooses not to comply with such an agreement. There was a time when commissions held a lot of power over carriers. They controlled rate increases and had many other levers to influence carrier behavior. But in a world where all three of the triple play products are largely deregulated there is only so much that any government agency can do to a rogue carrier.

Back to the details of the Frontier deal. The agreement, which is still to be signed by the California commission, would have Frontier do the following:

  • Provide 25 Mbps downstream and 2-3 Mbps upstream to an additional 400,000 households in California by December 31, 2022.
  • Provide 10 Mbps downstream and 1 Mbps upstream to an additional 100,000 unserved households beyond its CAF II commitments by December 31, 2020
  • Deploy 10 Mbps downstream and 1 Mbps upstream to 77,402 households in accordance with the CAF II requirements in the census blocks identified by the FCC
  • Deploy 6 Mbps downstream and 1 to 1.5 Mbps upstream to an additional 250,000 households in California

Altogether this would bring better broadband to over 800,000 California homes. But I feel sorry for the homes that are being upgraded to 6 Mbps. This will likely be their last upgrade before their copper gets torn down in the not-too-distant future.