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The Industry

Shrinking Competition

1854_gold_dollar_obvI bet that the average person thinks that telecom competition is increasing in the country. There are so many news releases talking about new and faster broadband that people probably thinks broadband is getting better everywhere. The news releases might mention Google Fiber or talk about 4G or 5G data and infer that competition is increasing in most places across the country. But I travel a lot and I am pretty certain that in most markets broadband competition is shrinking.

There are a few places getting new fiber. Google has built a few cities. CenturyLink has woken up from the long sleep of Quest and is building some fiber in some markets. And there are a handful of municipalities and other companies building fiber in some markets. This is bringing faster broadband to some cities, or more accurately to some neighborhoods in some cities since almost nobody is building fiber to an entire metro market. But it’s hard to say that this fiber is bringing price competition. Google has priced their gigabit fiber at $70 per month and everybody else is charging the same or more. And these big bandwidth products are only intended for the top third of the market – they are cherry picking products. Cities that are getting fiber are mostly not seeing price competition, particularly for the bottom 2/3 of the market.

But in most markets in the US the cable companies have won the broadband battle. I’ve seen a surveys from a few markets that show that DSL penetration is as low as 10% – and even then at the lower speeds and prices in most markets – and the cable companies serve everybody else.

It seems the two biggest telcos are headed down the path to eventually get out of the landline business. Verizon stopped building new FiOS and has now sold off some significant chunks of FiOS customers. It’s not hard to imagine that the day will come over the next decade when they will just quietly bow out of the landline business. It’s clear when reading their annual report that the landline business is nothing more than an afterthought for them. I’ve read rumors that AT&T is considering getting out of the U-Verse business. And they’ve made it clear that they want completely out of the copper business in most markets. And so you are also likely to see them start slipping out of the wireline business over time.

I can’t tell you how many people I meet who are convinced that wireless cellular data is already a competitor of landline data. It is not a competitor for many reasons. One primary reason is physics; for a wireless network in a metropolitan area to be able to deliver the kind of bandwidth that can be delivered on landlines would require fiber up and down every street to feed the many required cell sites. But it’s also never going to be a competitor due to the draconian pricing structure of cellular data. It’s not hard to find families who download more than a 100 gigabits during a month and with Verizon or AT&T wireless that much usage would probably cost $1,000 per month. Those two GIANT companies are counting on landline-based WiFi everywhere to give their products a free ride and they do not envision cellular data supplanting landlines.

Broadband customer service from the large companies has gone to hell. The large cable companies and telcos are among the worst at customer service when measured against all industries. This might be the best evidence of the lack of competition – because the big carriers don’t feel like they have to spend the money to be good. Most customers have very few options but to buy from one of the behemoths.

We were supposed to heading towards a world where the big telcos built fiber and got into the cable business to provide a true competitor to the cable companies. A decade ago the common consensus was that the competition between AT&T and Time Warner and between Verizon and Comcast was going to keep prices low, improve customer service, and offer real choices for people. But that has never materialized.

Instead what we have are the cable companies dominating landline broadband and the two largest telcos controlling the wireless business. Other competition at this point is not much more than a nuisance to both sets of companies. We see prices on broadband rising while broadband speeds in non-competitive markets are stagnating. And, most unbelievable to me, we’ve seen the US population replace a $25/month landline that sufficed for the family with cellphones that cost $50 or more for each family member. I can’t recall anybody predicting that years ago. It kind of makes a shambles of fifty years worth of severe telephone regulation that used to fight against telcos raising rates a dollar or two.

So I contend that overall competition in the country is shrinking, and if Verizon and AT&T get out of the landline business it will almost disappear in most markets. Even where we are seeing gigabit networks, the competition is with speed and not with price. People are paying more for telecom products than we did years ago, and price increases are outstripping inflation. Make no mistake – if I could get a gigabit connection I would buy it – but giving the upper end of the market the ability to spend more without giving the whole market the option to spend less is not competition – it’s cherry picking.

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Technology The Industry

Broadband in Big Cities

I’ve often written about the issues with rural broadband, but today I thought I would take a look at the state of broadband in the large cities. As people read and hear about Google and other fiber projects I think the natural assumption is that the cities either have fiber or soon will get fiber. I don’t think that’s true.

Let’s look at a few of the larger fiber builders and what they have done with cities. First is Verizon FiOS. It’s a great service and I had it at one of my previous homes. But for the most part it’s not been built deep in the heart of the larger cities. FiOS has been a suburban and medium town product and you are far more likely to be able to get FiOS in a suburb than if you live downtown.

Google is currently building a few cities. Both they and AT&T have also released a list of possible candidate cities for fiber. But Google only builds in neighborhoods where enough customers sign to buy fiber. And AT&T’s fiber construction seems to be more press release for now than substance.

And nobody wants to talk about is that none of these providers builds to MDUs. Not FiOS, not Google, not AT&T, not the munis and pretty much not anybody else. Nobody has solved the inside wiring issues that come with multi-dwelling units, and so none of the big fiber providers are building to them. In some cities over half of the living units are in MDUs, and even when fiber comes, these residents don’t get it.

There are a few companies that are specializing in MDUs, but they either concentrate on student housing or on that small slice of apartment buildings that have already been wired with category 5 cable. And most apartments and condos are wired only with traditional coaxial cable and telephone copper. And then you have to layer the contractual issues on top of the wiring issues. The FCC took a stab a few years ago of fixing some of the more egregious abuses where cable companies had tied up the rights to the existing wire inside MDUs. But they didn’t close all of the loopholes and there are plenty of apartment complexes that are still contractually locked into allowing only the cable company.

But then one has to ask if any of this is all that bad, because the cable companies in the large cities have increased cable modem speeds and it’s hard to find a city that doesn’t have speeds of at least 100 Mbps available. But you have to look a little closer to see that is not as good as it sounds.

The faster cable modem products are expensive. In many cities the 100 Mbps products are around $100 or more per month, absent any sign-up specials. But that is not the only cost customers face. For example, I have Comcast and they wouldn’t let me buy a 50 Mbps cable modem without having to take some of their cable product. Cable companies don’t have to sell naked cable modems, and so there are a lot of households that just can’t afford the big packages that are needed to get the faster cable modem speeds. This goes back to the same categorization of broadband as an information service, and just like with net neutrality, the FCC doesn’t have the authority to force cable companies to sell naked cable modems. Finally, there are problems with cable modems in some MDUs. Some of them with older wiring will not allow the delivery of faster data speeds. Or, in some MDUs the internet comes with the rent and you get whatever the landlord will pay for.

There is some good news for cities in that over the next decade the cable companies are going to be able to offer speeds as fast as a gigabit. They have a lot of work to do on their networks to get to those speeds, but the technology to get there is already developed or on the drawing boards at Cable Labs. One has to wonder if the cable companies will upgrade in cities where they don’t have a real competitor. One has to think that the cable companies will be as judicious in handing out gigabit speeds as they today are handing out 100 Mbps speeds. It’s one thing to be in a market that has the potential for very fast data speeds, but it’s something else to be able to actually order it or to be able to afford it.

I am afraid that most cities are going to be at the mercy of the cable monopoly for decades to come. FiOS is no longer expanding. Google is going to go where they go, and that is not going to be everywhere, even in the cities where they do build.

There is some hope in the future for apartment buildings. I’ve reported before on a technology that uses ultrawideband that looks to be able to deliver gigabits of data over existing coax without disturbing the cable traffic. Think of it as DSL for cable systems. But the fast versions of that technology are still a few years away, and even that is going to require somebody to build a fiber to the front of an apartment.

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Current News What Customers Want

We Don’t Have Enough Bandwidth

I read three different articles Friday that have a common theme – we just don’t have enough bandwidth in this country.

The first article from the Fiber To The Home Council which reports on a recent survey. They report that video viewing over the Internet is growing faster than expected, led by the viewing habits of the young. One third of young viewers watch video on a cell phone or tablet at the same time that they watch TV. And 12% of viewers under 35 report watching all of their content over the Internet.

The article also points out a recent report from Conviva, a web optimization company, who reports that they sampled 22.6 billion video streams and found that 60% of them suffered some degradation due to inadequate bandwidth.

The gist of the article is that demand keeps growing while many parts of the Web are near or at a breaking point in terms of capacity and quality. It’s also evidence that homes don’t want to just watch streaming video, they want to watch multiple streaming videos.

In another article Time Warner announced that it would roll out significantly faster Internet service, but only in competitive markets. The upgrades will come in markets where they are competing against fast competition, such as places where Verizon has built FiOS, where AT&T has relatively fast U-verse and where municipalities have built fiber networks. The company says that they will upgrade to DOCSIS 3 and also install much faster wireless routers. They also will upgrade the DVRs in these markets and roll out apps that are designed for the faster Internet.

But Time Warner also made it clear that they have no plans to upgrade markets where there is not fast competition. My take away from this article is that a lot of the incumbent providers are still only doing upgrades in response to direct competition. Otherwise they are quite satisfied with the status quo and only make investments under duress.

Finally, the citizens of Bergen County, New Jersey have started a petition to ask their politicians to offer whatever is necessary to attract Google fiber to the county. Bergen County is the most populous county in the state.

I find this somewhat surprising because most of the people in this county have Verizon FiOS available. And recently Verizon said they plan to have all of New Jersey covered by FiOS. Most of the rest of the country would be thrilled to be upgraded to the kinds of speeds available in Bergen County. FiOS speeds differ by market, but most markets have speeds available from 15 Mbps download to 150 Mbps download. And a few markets have 300 Mbps and 500 Mbps speeds available. Of course, Google would be bring 1 Gbps speeds for a little more than what people are paying for 50 Mbps from Verizon.

My takeaway from this is that people are beginning to realize how important very fast Internet service is. Even those who already have some of the fastest Internet speeds in the country do not view what they have as a value.

Unfortunately for the citizens of Bergen County I find it highly unlikely that Google will ever build to compete against another fiber network. Verizon could easily upgrade their network to compete with Google on speed and price and the conventional wisdom is that nobody is going to build a second fiber network to homes or both fiber owners will go broke competing against each other.

But all of these articles are indicative of the daily articles I see that continue to highlight the big gap between the bandwidth people want and what they are being offered in the market. We just don’t have enough bandwidth in the country, at least according to consumers.

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Current News The Industry

Will Poor People Get Google Fiber?

FiOS installed in Montclair, New Jersey (Photo credit: Wikipedia)

This was a great question that was posed by a recent article in Forbes Magazine. In this country we have a long history of having telecom provided by monopoly telephone companies and more recently by cable companies. Both incumbent providers have been mandated to serve almost everybody in their footprint. In the case of telephone companies this has been done by regulatory fiat by the various state Commissions that regulate telephone service in each state. Every state has rules for incumbent telephone companies that include a requirement for universal service using a concept known as carrier-of-last-resort. When a telephone company got the right to serve an area they were expected to provide service to everybody in that area, within reason, and then the costs of the more expensive-to-reach customers was averaged with everybody else. I say within reason, because even the telephone companies were allowed an out for really expensive-to-reach customers. For instance, if a farmer lived back a seven-mile long lane, the phone company might only provide a mile or two of the service line and expect the customer to pay for the rest.

And cable companies had similar requirement that came through the franchise agreements that they signed with local governments. If a cable company wanted to serve a town, then they were required to serve everybody in town in order to get the franchise.

Today fiber is being built by both regulated monopoly carriers like Verizon, but also by competitive providers like Google. But none of the fiber builders has the same carrier-of-last-resort or cable-like franchises requirements that the incumbents faced when they built their copper networks.

So to answer the opening question, will everybody get Google fiber?  The answer is no, for the following reasons:

  • Copper is still in place.  As long as the copper is still in place for the telephone and cable company, they can satisfy their service obligations by connecting customers on copper. They are thus relieved of building fiber everywhere as long as copper still exists.
  • Exclusive contracts with MDUs.  Anybody that builds with fiber needs to get the approval of the owner of multi-tenant buildings, be that apartments or multi-tenant business buildings. And some of those building owners are not going to give permission. Some building owners will have signed exclusive access contracts with the incumbent cable company. The FCC invalidated some types of exclusivity a few years ago, but there are still contractual ways for the cable company to keep out competition. Further, some building owners just don’t want to let a provider into their complex.
  • Places too expensive to serve.  Fiber overbuilders can pick and choose where to serve. It is often very expensive to bring fiber into apartment buildings, particularly older apartments, and many fiber builders choose to not build or selectively build to apartments. Verizon is famous for avoiding high-cost places. If you look at a suburban map of Verizon FiOS you would find a real patchwork of served areas. They will build to one pocket of houses but then skip over ones right next door, certainly due to cost. For the most part Verizon has elected to not dig up streets to build fiber, and so FiOS is more commonly placed in neighborhoods with existing Verizon aerial wires, or in neighborhoods where there is existing conduit in the ground. Verizon also often skips past apartment complexes. But I don’t want to single out Verizon since this is true of just about every fiber overbuilder.
  • Redlining, or the nearest thing to it.  As the article suggests, the build-out patterns of Verizon, Google and just about any other fiber overbuilder have a significant taste of redlining about them. It is easy for the fiber builders to say they are building where the cost is the lowest and the returns are expected to be the highest, but this means that they generally end up avoiding large apartment complexes and poorer neighborhoods. If they had set out to deliberately redline they would end up with basically the same networks that actually get built.

And so we are entering a future where there will be definite fiber haves and have-nots. There has been a lot of this for the last few decades since the introduction of DSL and cable modems. Rural areas for the large part have received very little broadband compared to urban and suburban areas. But the future digital divide is going to be starker, with the divide being everywhere, including the cities and suburbs, with some homes having fiber and others not.

For the last decade there has been conventional wisdom that having fiber connected to your home will add to the value of your house. I guess we are going to get to see this tested on a very large-scale.

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Technology The Industry

Will Telecom Investing Become Sexy Again?

Image via CrunchBase

Will the fact that Google is investing in fiber make it sexy again to invest in telecom? The last time that there was a big boom in investing in new telecom ventures was the late 90’s. At that time there were dozens of start-up CLECs, a number of which were able to issue IPOs and go public. Every smart investor had some telecom stocks in their portfolio.

But the new CLECs and telecom firms of that time almost all went bust with only a few of them still around today. There are a number of reasons for the bust. The business plans of many telecom startups depended upon arbitrage – using the facilities of the incumbent rather than making infrastructure investments. And many of the telecom start-ups had bad business plans that expanded into too many markets too quickly to do it well. And somehow the telecoms got tied in with the dot.coms and when those went bust the telecoms followed them down the tubes. And investors lost a lot of money and got soured on telecom. The lasting effect of the bust was that it became unsexy to invest in telecom.

And almost nobody has invested in telecom since then. It’s hard to find anybody who doesn’t recognize that the US is falling behind the rest of the world in telecom infrastructure, namely fiber. Since the telecom bust the only ones investing in fiber to whole communities have been Verizon, some municipalities and some smaller independent telephone companies. Verizon’s decision to build fiber was a bold one, but it didn’t drag anybody else along. And Verizon’s fiber build dwarfs all of the rest of the builders collectively. The vast majority of the country does not have fiber but wants it badly.

But now Google comes along and is boldly investing in fiber in large communities – Kansas City and Austin. What they are telling the world is that there is profit in fiber, profit in infrastructure investing. Kansas City was touted as a trial, but by having announced Austin so quickly it is obvious that Google thinks that their experiment is working. And while Google has made an announcement for Provo, Utah, that is a one-off since they were able to pick up an existing fiber network and customers at a very good price.

I keep hearing that there is a lot of money today on the sidelines, meaning money waiting to get invested in good projects. And this is interesting to me since there is such an obvious need in this country today for new and upgraded infrastructure. In addition to a huge need for fiber networks there is a huge demand for clean energy generation plus the usual things like bridges and roads. Perhaps at least to some small degree the Google decision to boldly invest in infrastructure can be the first step towards unleashing the private equity in the country to invest in infrastructure again. Google thinks such investing can be profitable and obviously it is good for the country. Will others follow?

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Current News The Industry

Two Fiber Networks?

Image of Austin, Texas (Photo credit: Wikipedia)

The conventional wisdom in the industry is that two companies would never invest in side-by-side fiber networks to serve residential customers. I have had this conversation many times with clients who were planning to build a fiber network and who were worried about the response of the incumbent providers. Everyone has always believed that the first fiber builder wins because there is not enough margin in the residential market to support two fiber networks. AT&T has shown that conventional wisdom to be wrong by announcing that they will build a second fiber network in Austin as a counter to Google’s announcement to do the same.

This is not without precedent, although on a much smaller scale. The City of Monticello, Minnesota built a fiber network to pass every home and business in the City. The municipal fiber build was prompted by the fact that the City had some of the highest telecom rates in the country. Soon after the City built their network, TDS Telecom, the incumbent telephone company built a competing fiber network.

And as expected, both fiber providers are not faring well. After building fiber TDS decided to win back customers with an aggressive price war. Charter, the incumbent cable company also got into the price war fray. And so customers in Monticello are benefitting from a price war while all of the companies are underperforming.

It is fairly easy to understand TDS’s motivation for building the fiber network and for the price war. The company serves numerous other towns like Monticello and I see their response there as a clear warning to anybody else who is planning on overbuilding their serving territory. It is also clear that they are hoping that the City will give up and leave the fiber business.

And now we are going to see this scenario play out in the much bigger market of Austin. Google already overbuilt one AT&T market in Kansas City and one can easily envision Google overbuilding many other large cities. AT&T’s response in Austin is the same as TDS’s response in Monticello. AT&T has made it clear to Google and others that they are not going to side idly by and watch their major markets go to somebody else.

So it will be interesting to see the impact of AT&T’s announcement. It’s possible that the announcement will cause Google to pause and not build in Austin. Certainly they will not do as well as expected if there are two fiber networks. It’s also possible that both companies will build fiber and we will see side-by-side competition with two fiber networks and the cable company – the kind of competition we have never seen in a major city in the US.

But the real impact of AT&T’s announcement is going to be felt everywhere else. One has to wonder what kind of impact AT&T’s announcement will have on any company, Google included, who is contemplating building a fiber network in a large city. Google has very deep pockets and might proceed anyway, but almost any other company would not be able to afford the much lower returns that come with hard competition.

While this announcement might result in real competition for the citizens of Austin, it also might have the effect of stifling anybody else from trying to build fiber in a large City. This announcement could result in killing anybody from building fiber in large cities due to the fear of a similar reaction. While hearing about two companies wanting to provide gigabit fiber sounds like a good thing, the long-term consequence of this might mean less overbuilding, less fiber and less competition.

And I don’t know that AT&T had any choice. Their only other option was to watch their large markets go to an aggressive competitor. Nobody knows what Google plans to do, but some have speculated that they might build in most of the major cities. Now we’ll just have to watch this one play out, so pull up a chair. This should be interesting.