The Growing Dislike of Big ISPs

The annual ratings from the American Consumer Satisfaction Index came out recently, and they show that consumer dislike for the big ISPs is increasing. This survey looks at how consumers feel about a wide range of businesses, and the ISPs have been ranked as some of the most disliked corporations for a number of years.

The survey asks numerous questions and creates a satisfaction scale from 1 to 100. The survey looks at several different categories of telecom companies and has separate rankings for for cable TV providers, broadband providers and a new category for streaming video providers.

Among the big ISPs that offer cable TV service, the rank of every provider except AT&T U-Verse sank compared to last year. AT&T was the highest rated company in this group with a rating of 70. At the bottom was Mediacom with a rating of 55, down from 56 a year ago. The two giant cable companies both saw a drop in consumer satisfaction: Charter had a huge drop from 63 down to 58, Comcast dropped from 58 to 57.

The rankings for how consumers feel about their broadband provider were similar. The only big ISP that didn’t drop was Comcast that stayed at a ranking of 60 for two years running. Everybody other big ISP dropped. At the top of the list was Verizon FiOS which dropped from 71 to 70. At the bottom was Mediacom again which had a big drop from 58 to 53. Charter also had a big drop from 63 to 58. Rounding out the bottom rankings were Frontier (54), Windstream (56) and CenturyLink (58)

Streaming services got significantly higher rankings. Topping this first time list were Netflix, Playstation Vue and Twitch with a ranking of 78. At the bottom were Sony Crackle (68), Showtime Anywhere (70) and DirecTV Now (70), all still significantly better than traditional cable companies.

It must be frustrating for the big ISPs to see their customer satisfaction drop year after year. The rankings of the ISPs are lower than other unpopular industries like airlines, banks, insurance companies and even the Internal Revenue Service.

If there is any upside to the low customer satisfaction rankings it’s that it creates opportunities for competitors. It’s been conventional wisdom for years that a new competitor will get up to 30% of a market just for showing up with an alternative network – assuming they know how to sell and have decent customer service.

They survey doesn’t dig into the reasons for the sinking dissatisfaction, but it’s easy to speculate on some of the reasons. People are certainly unhappy with traditional cable TV due to the ever-rising prices. High prices are the number one factor cited for consumers who are cutting the cord, and the dropping satisfaction shows there is likely another growing pile of future cord cutters.

It’s a little harder to understand the dissatisfaction with broadband. At least in major metropolitan areas the ISPs have continued to unilaterally increase download speeds with only modest rate hikes. One would expect satisfaction with the the broadband product to be higher and my guess is that the low ranking deal more with the pain involved in having to ever call these big companies. Compared to other businesses we all deal with, the interaction with the cable company / ISP is often the one we dread the most. The other likely cause for dissatisfaction is that ISPs often don’t deliver the speeds they promise. This varies by market, but we’ve seen cities where consumers only get a fraction of the speed they are paying for.

It’s much easier to understand unhappiness with ISPs immediately outside of big cities. Broadband is smaller towns is often still generations behind and is inadequate for what households expect today in terms of download speeds and latency. Anybody who reads this blog will understand the near-hatred for the ISPs in rural areas. The cable companies don’t come to rural America and the big telcos have abandoned maintenance of the copper networks for decades. Rural broadband is either poor or nonexistent with practically everybody hating the companies that won’t bring them broadband.

 

Data Caps Again?

My prediction is that we are going to see more stringent data caps in our future. Some of the bigger ISPs have data caps today, but for the most part the caps are not onerous. But I foresee data caps being reintroduced as another way for big ISPs to improve revenues.

You might recall that Comcast tried to introduce a monthly 300 GB data cap in 2015. When customers hit that mark Comcast was going to charge $10 for every additional 50 GB of download, or $30 extra for unlimited downloading.

There was a lot of public outcry about those data caps. Comcast backed down from the plan due to pressure from the Tom Wheeler FCC. At the time the FCC probably didn’t have the authority to force Comcast to kill the data caps, but the nature of regulation is that big companies don’t go out of their way to antagonize regulators who can instead cause them trouble in other areas.

To put that Comcast data cap into perspective, in September of 2017 Cisco predicted that home downloading of video would increase 31% per year through 2021. They estimated the average household data download in 2017 was already around 130 GB per month. You might think that means that most people wouldn’t be worried about the data caps. But it’s easy to underestimate the impact of compound growth and at a 31% growth rate the average household download of 130 GB would grow to 383 gigabits by 2021 – considerably over Comcast’s propose data cap.

Even now there are a lot of households that would be over that caps. It’s likely that most cord cutters use more than 300 GB per month – and it can be argued that the Comcast’s data caps would punish those who drop their video. My daughter is off to college now and our usage has dropped, but we got a report from Comcast when she was a senior that said we used over 600 GB per month.

So what are the data caps for the largest ISPs today?

  • Charter, Altice, Verizon and Frontier have no data caps.
  • Comcast moved their data cap to 1 terabyte, with $10 for the first 50 GB and $50 monthly for unlimited download.
  • AT&T has almost the stingiest data caps. The cap on DSL is 150 GB, on U-verse is 250 GB, on 300 Mbps FTTH is 1 TB and is unlimited for a Gbps service. They charge $10 per extra 50 GB.
  • CenturyLink has a 1 TB cap on DSL and no cap on fiber.
  • Cox has a 1 TB cap with $30 for an extra 500 GB or $50 unlimited.
  • Cable One has no charge but largely forces customers who go over caps to upgrade to more expensive data plans. Their caps are stingy – the cap on a 15 Mbps DSL connection is 50 GB.
  • Mediacom has perhaps the most expensive data caps – 60 Mbps cap is 150 GB, 100 Mbps is 1 TB. But the charge for violating the cap is $10 per GB or $50 for unlimited.

Other than AT&T, Mediacom and Cable One none of the other caps sound too restrictive.

Why do I think we’ll see data caps again? All of the ISPs are looking forward just a few years and wondering where they will find the revenues to increase the demand from Wall Street for ever-increasing earnings. The biggest cable companies are still growing broadband customers, mostly by taking customers from DSL. But they understand that the US broadband market is approaching saturation – much like has happened with cellphones. Once every home that wants broadband has it, these companies are in trouble because bottom line growth for the last decade has been fueled by the growth of broadband customers and revenues.

A few big ISPs are hoping for new revenues from other sources. For instance, Comcast has already launched a cellular product and also is seeing good success with security and smart home service. But even they will be impacted when broadband sales inevitably stall – other ISPs will feel the pinch before Comcast.

ISPs only have a few ways to make more money once customer growth has stalled, with the primary one being higher rates. We saw some modest increases earlier this year in broadband rates – something that was noticeable because rates have been the same for many years. I fully expect we’ll start seeing sizable annual increases in broadband rates – which go straight to the bottom line for ISPs. The impact from broadband rate increases is major for these companies – Comcast and Charter, for example, make an extra $250 million per year from a $1 increase in broadband rates.

Imposing stricter data caps can be as good as a rate increase for an ISPs. They can justify it by saying that they are charging more only for those who use the network the most. As we see earnings pressure on these companies I can’t see them passing up such an easy way to increase earnings. In most markets the big cable companies are a near monopoly and consumers who need decent speeds have fewer alternative as each year passes.Since the FCC has now walked away from broadband regulations there will be future regulatory hindrance to the return of stricter data caps.

Continued Cable Rate Increases

Fatty_watching_himself_on_TVEvery year about this time we see the big cable companies increase rates. Rather than list all of the changes at all of the big companies, I’m going to look at the rate increases announced by Mediacom. I’m not particularly singling them out, but the increases they are implementing this year are typical and I think Mediacom reflect the trends we are now seeing around the industry.

First, Mediacom increased the rate on its basic internet product while bumping the speeds higher. They are increasing the price from $49.99 to $54.99 and increasing speeds from 15 Mbps download to 60 Mbps download. Both of those changes are trends I see across the industry.

Mediacom claims the increase in data prices is due to the increased speeds. Anybody who understands the ISP industry knows that is a fairly lame excuse, but the speed increase gives them cover to make the claim. The cost of providing bandwidth (except for the tiniest and most remote ISPs) is only a few dollars per month per customer. Mediacom will certainly see a one-time burst in the use of data because of the speed increases since they will have unleashed homes that were restricted by the slower 15 Mbps limit. But after this one-time burst they will see usage return to the former growth curve. I have a client that did a similar upgrade last year and they saw about a 25% immediate increase in data usage as customers moved to the faster speeds. But that one-time increase doesn’t cost the ISP very much money.

But Medicom’s increase reflects the new trend in the industry for raising data prices. Verizon started this a few years ago with a small increase in FiOS and almost all large ISPs have now done the same thing. But unlike cable rate increases that are due to programming increases, ISPs have a much harder time defending data price increases. Yet the big ISPs are under constant pressure from Wall Street to increase the bottom line – and since they are all losing cable customers they have little recourse but to raise data rates. I expect this will become a routine annual increase like we’ve always seen in cable rates – but the public is going to catch on after a while that the rate increases go straight to profits and are not due to any underlying costs for providing data.

The other trend Mediacom is matching is the one to increase data speeds. Just last week, for example, Verizon FiOS raised speeds across the board with its fastest product now at 750 Mbps. Comcast and Charter are on a similar path, increasing speeds in some markets with plans to increase speeds everywhere. I think the cable companies have figured out that increasing speeds doesn’t cost them much and it keeps customers happy while fending off possible challenges from fiber competitors.

Mediacom also increased cable TV rates and announced an increase of $3.95 in its expanded basic package. They claim that programming costs have increased during the year by $5.50 to $6.50 (they have different line-ups in different markets). Those are not untypical numbers. But they claimed that “We are not passing along that entire increased expense to customers.” And that is not true.

In addition to the basic rate increase the company increased two other fees. They increased the ‘Local Broadcast Channel” fee by $1.61 per month and raised the regional sports channel surcharge by $0.24 per month. So altogether they raised various components of cable rates by $5.80 cents, which likely covers the increased programming costs.

This trend of disguising prices using fees is also now industrywide. Cable companies of all sizes have moved part of their cable rates into these ancillary fees, making it look like cable is more affordable than it is. The companies advertise the base ‘cable’ rates without mentioning the real cost of buying cable. These fees are confusing to customers, who often think that they are taxes of some sort. In Mediacom’s case the Local Broadcast Channel fee and the local sports channel surcharge fee now total an eye-popping $11.83 per month.

And of course, not all of these rate increases affect all customers immediately. There are customers with various specials who might not see some or all of these increases until their special expires. But a normal customer paying a month-to-month bill is going to get a total increase of $6.85 per month. That looks to be a fairly normal increase when looking around the industry this year. Each company is making different choices on the rates to raise. In addition to the choices Mediacom made, some are increasing settop box and cable modem rates to get the increases they want. Since a significant percentage of customers buy both cable TV and broadband, I’m guessing that customers don’t really much care which rates go up, they just care about the total increase in their bill.

An Argument for Data Caps

slow-downA few weeks ago Mediacom sent a letter to the FCC as part of Docket 16-245 that defended data rate caps. The letter was signed by Joseph E. Young, the Senior Vice President, General Counsel, and Secretary of the company.

Mr. Young lays forth probably the best argument for data caps I have seen. This is from his letter:

Imagine you are out for a walk and experience a sudden, irresistible craving for Oreo® cookies.  You only want to spend two dollars, which means that you will be able to buy a two-pack or maybe even a four-pack but for sure you cannot get the family size of over 40 cookies.  For that many, you have to spend more. Of course, it would be nice if your two dollars bought you the right to eat an unlimited number of cookies, but you know that is not the way our economy works. It is the same for the Starbucks latte you might want to drink with your cookies and for socks, gasoline and just about every single one of the thousands of other products and services that are for sale in the United States, including essentials like water and electricity. 

In the case of virtually everything you buy, the fact that your cost goes up as you consume more will neither surprise you nor set you off on a passionate crusade to get the government to force producers to sell an unlimited quantity at a fixed price. We all know this to be the way things work in our economy and understand at some level that there are valid reasons for why that is so. . . . Remarkably, the only exception to this truism we can think of is bandwidth.

He goes on to say that what ISPs are doing is not greed, but just trying to put broadband on the same basis as other products. He laments that ISPs are thought of as greedy when trying to price their product like everything else in the economy. You have to admit that at least on the surface this sounds reasonable.

However his argument lost a little steam when he went on to say that, “A fair number of otherwise intelligent people vociferously complain about ISPs imposing a “cap” on bandwidth usage.” He basically called everyone who is against data caps stupid, and this probably won’t go well at the FCC, where a lot of staff are against data caps.

But to counter the Mediacom argument you only have to look back to see how Comcast implemented their data caps earlier this year to see how data caps are really just all about greed and greater revenues. Comcast had a data cap of 250 GB for many years, although it was rarely enforced. The company raised the cap to 300 GB and then starting enforcing it in various trials around the country. They offered two options to customers that exceeded the cap: either pay $30 more per month to get unlimited data or else pay $10 for every 50 GB over the cap.

Both of those options increased revenues for Comcast significantly. And that’s where the greed came to bear. If this was not about making more money Comcast could have implemented data caps with a rate rebalancing. As an example, they could have lowered all data plan rates by $10, so that people who don’t use a lot of data would save money. Only customers who exceeded the caps would pay more. If the rate rebalancing was done right, then Comcast would keep the same revenues as before and customers would be paying more in line with their usage. To use Mr. Young’s analogy, if Comcast wanted to get prices right they should have started out by first right-pricing the small pack of Oreos. Instead Comcast was satisfied that the small pack of Oreos cost as much as the large pack, and they then jacked up the price of the large pack.

This was clearly a money-making scheme for Comcast, and the public outcry was so big that it got a lot of attention from the FCC. Comcast backed down and unilaterally raised the data cap on most plans to one terabyte. But new last week show that they want to impose the same pricing scheme on the 1 terabyte limit. This won’t affect many users today, but within a decade it will affect a significant percentage of Comcast’s users.

If Comcast had rebalanced rates they would have been lauded instead of vilified. While those that paid more might be yelling, the millions who paying less would largely offset that. But instead Comcast went straight for the money grab and to their chagrin, everybody was watching.

The other thing that Comcast missed is that, for most products we buy, the prices charged have some semblance to their costs. It certainly costs more to make a big pack of Oreos than a small one. But the public gets upset when prices greatly exceed costs – just look at the recent outcry about the EpiPen. Comcast’s big problem is that the public understands that there is very little difference in cost between most Internet users. Yes, those who use huge amounts of data cost an ISP more money, but there is very little difference in cost to Comcast between a household using 200 GB and one using 500 GB in a month. There is no gigabyte spigot at Comcast that is equivalent to a gas pump that would justify a big price differential between these two households. There would have been a lot less public outrage had the overage charges been $5 rather than $30.

As a big user I am obviously not nuts about the idea of paying more for broadband. But I wouldn’t have great qualms if a rate rebalancing brought very cheap prices to my mother (who barely uses any bandwidth) while I am charged more. But that’s not what we are seeing with price caps in the market. Instead we have low bandwidth products that are overpriced and the ISPs wanting to charge even more to somebody who actually uses what they have purchased.

Industry Shorts – July 2016

unflagHere are a few topics I’ve been following but which don’t merit a full blog.

Mediacom Announces Upgrade Plans. Mediacom has announced plans to invest over $1 billion to upgrade its networks. The main thrust of the upgrades would be to increase speeds up to a gigabit in the 1,500 communities it serves in 22 states.

It will be interesting to see how they do this. There are many markets where they don’t have to do a lot more than upgrade to DOCSIS 3.1 and introduce new cable modems for high-bandwidth customers. But a lot of their rural markets will require forklift upgrades involving headend upgrades as well as revamping the coaxial cable plant. In the worst cases they’d have to replace coaxial cables, but in others would have to replace power taps and line amplifiers.

The company also announced it would open public WiFi hotspots in many of its markets. However, their current WiFi program is pretty weak by industry standards and only gives existing broadband subscribers access to 30 free WiFi minutes per month.

Dish Cuts Back on Ad-Skipping. Dish Networks has agreed to largely disable the feature in their new VCRs that let customers skip ads automatically. This has become such a sticky point in negotiations for content that Dish finally agreed to cut back on the very popular feature. Dish reached agreements with Disney and CBS to disable the feature in order to get new programming for Dish’s Sling TV OTT offering.

Google Launches Undersea Cable. Google and Japanese telecoms have built a new undersea cable joining Portland, Seattle, Los Angeles and San Francisco to two POPs in Japan. The cable can carry 60 terabits of data per second and is now the fastest undersea fiber. Google is also planning to complete a fiber between Florida and Brazil by the end of the year. Facebook and Microsoft are working together on an undersea connection between Virginia Beach and Bilboa Spain. With the explosive growth of Internet traffic worldwide this is probably just the beginning of the effort to create the needed connectivity between continents.

It’s interesting to see that some of the big traffic generators on the web are willing to spend money on fiber, and one has to suppose this will save them money in the long term by avoiding transport charges on other fiber routes. It’s probably also not a bad time to own a fiber-laying ship.

UN Declares Broadband Access a Universal Human Right. The United Nations recently passed a series of resolutions that makes online access to the Internet a basic human right. Among the key extracts in the resolutions are:

  • That people have the same rights online as offline, “in particular, freedom of expression, which is applicable regardless of frontiers and through any media of one’s choice.”
  • That human rights violations enacted against people due to making their views known online are “condemned unequivocally,” and states are held accountable for any such violations.
  • Any measures to “intentionally prevent or disrupt access” to the internet are also “condemned unequivocally,” and all states should “refrain from and cease such measures.”

While it’s easy to argue that much of what the UN does has no teeth, it has been the forum since its creation for recognizing human rights.

Netflix Users Would Hate Ads. In a survey with mixed results it’s clear that Netflix users have strong feelings about introducing advertising into the popular ad-free service. In a survey given by All Flicks, 75% of Netflix users said they would dump the service if it started carrying ads.

In a somewhat contradictory finding, the pole indicated that most Netflix users would pay a premium price to avoid ads if there were options. Nearly 60% of Netflix users said they would pay $1 per month to avoid ads with many others saying they would pay even more.

Cable Companies Try Skinny Bundles

Comcast truckWhile all of the cable companies and their trade organizations publicly deny that cord cutting is a real phenomenon, in this most recent quarter most of the large cable companies have announced a skinny bundle package delivered over the web. It’s hard to think that these packages are aimed at anybody but cord cutters and in fact, one has to wonder if they might lure more people away from the big packages.

CEO Rob Marcus of Time Warner Cable says that their skinny bundle is an attempt to get rid of settop boxes. TWC just announced in New York and New Jersey that all cable customers can now use Roku instead of settop boxes. He said that TWC has a long-term strategy to get out of the settop box business, which is a big expense for the company and something that customers really don’t like paying for. I know that for most of my clients the monthly settop box rentals are one of the most profitable parts about selling cable TV and so his statement puzzles me a bit. But my clients are not working in major metropolitan markets and perhaps the total cost of tracking and swapping boxes is different for a large company.

But since TWC offers Roku for everybody I’m not sure that settop boxes are a very good explanation for their skinny bundle. TWC is now trialing a skinny bundle in New York City, available only to its data customers. It starts at $10 per month for 20 channels with options to add movie channels and other networks running up to $50 per month. That sure looks to be aimed at cord cutters.

And most of the other cable companies are also limiting their offerings to their own data customers. For instance, Comcast has launched a trial in the Boston area of a skinny bundle they are branding as Stream for their own data customers at $15 per month, including all taxes and fees. The package includes local networks, HBO, and some streaming movies. They plan to take this nationwide in 2016. The unique feature of the Comcast product is that it is not truly an OTT product since it doesn’t use the shared data stream but is delivered with separate bandwidth on the cable network.

Charter has launched what they are calling Spectrum TV. It starts at $12.99 per month and comes with a free Roku 3 player. This bundle contains 19 channels including the four major off-air networks. For an additional $7 per month customers can add more channels including ESPN, and for even more money customers can add HBO or Showtime. .

CableVision launched packages back in April of this year that includes a digital antenna for receiving local channels. They are offering a 50 Mbps data product plus the antenna plus HBO for $44.90 per month.

This isn’t limited to just the cable companies. CenturyLink is supposedly getting ready to trial a skinny bundle for its data customers. There are no details yet of pricing or line-up.

This all got started with Dish networks and their Sling TV product. Unlike these other products that, for now, are only available to the data customers of each ISP, Sling is available to anybody with a fast enough connection. I previously reviewed Sling TV and it had a lot of problems. I tried it during the first football game of the season and it was so bad that I abandoned it. I just watched Maryland beat Georgetown in basketball last night and the video was still out of sync with the audio. It’s getting better, but is still not as good as cable TV.

It’s interesting that most of the companies like CenturyLink say their skinny bundles are aimed at cord cutters, but even more specifically are aimed at millennials. I look at the channels offered and my bet is that baby boomers like me are going to more interested in this than millennials. I guess we’ll have to wait and see who subscribes to the skinny bundles.

Finally, Speed Competition

cheetah-993774We are at the beginning of a big change in urban Internet speeds. Recently, there have been all sorts of announcements about companies upgrading speeds or wanting to build fiber in major markets.

For instance, Comcast says that they are going to upgrade all of their systems to DOCSIS 3.1 within about two years. This new CableLabs standard is going to allow them to offer far faster speeds to their customers. DOCSIS 3.1 allows a cable system to bond together empty channels to make one large data pipe and theoretically, if the networks were empty of television channels, they could offer download speeds up to 10 Gbps. But since there are still lots of cable channels on these network the more realistic maximum speeds for now will be a gigabit or maybe less depending upon the spare channels available in any given system.

Comcast has already started the process of upgrading customer speeds. For example, in much of the northeast they have upgraded customers from 25 Mbps to 75 Mbps and from 105 Mbps to 150 Mbps. They’ve announced that these same upgrades will be done in all of their systems. They’ve said in future years there will be more upgrades to go even faster.

Other cable companies are likely to follow suit. MediaCom has already made gigabit announcements. Time Warner in Austin also greatly increased speeds. Cox has announced aggressive plans for speeds. It’s likely almost all urban cable systems will be upgraded to DOCSIS 3.1 within a few years.

Meanwhile, CenturyLink has been starting the process of building fiber in most of their larger markets. It looks like they are building fiber in cities like Seattle, Portland, Minneapolis, Phoenix, Denver, Salt Lake City, and a number of other markets. They will offer speeds that vary from 40 Mbps for $30 to gigabit speeds for $80 as part of bundled packages. CenturyLink is also experimenting right now in Salt Lake City with G.Fast, testing a 100 Mbps product over copper. Between the two products the company thinks they will be able to offer faster speeds to a lot of urban and suburban customers.

And of course, Google has been rolling out fiber and can be credited with popularizing the concept of gigabit fiber. They have built or are launching in Kansas City, Austin, Atlanta, Provo, Salt Lake City, Nashville, Raleigh-Durham and now San Antonio. They have released a long list of other cities where they may go next.

Finally, there are numerous smaller companies and municipalities that are already building fiber or who have plans to build fiber.

Comcast’s new philosophy is a 180 degree turnabout from a few years ago when they said that customers didn’t need bandwidth and that they would give customers only what Comcast thought they needed. It seems now that Comcast is adopting the philosophy of unilaterally increasing speeds, even in markets where they might not have an immediate competitor on the horizon. They already have the customers and they already have the networks and they can take the wind out of the sales of a potential fiber competitor if customers in any given markets already have fast speeds at an affordable price.

I think Comcast and the other companies are smart to do this. The higher-priced data products are probably the highest margin products we have ever had in this industry. It doesn’t cost a whole lot more than a few dollars to buy the raw bandwidth needed to serve a data customer and it’s widely believed that for large companies the margins are in the 80% to 90% range. It’s a wise decision to protect these customers, and by being proactive with speeds the cable companies will make it a lot harder for other companies to take their customers. And I think they have finally begun to learn the little secret that many have already figured out – faster speeds don’t really hurt profitability and a customers with a 100 Mbps connection doesn’t use much more data than one with a 20 Mbps connection, they just download things faster.

So what we are seeing now is competition through speed rather than competition through pricing. All of the comparisons I have ever seen show that US broadband prices are significantly higher than in any other developed countries. When Google or CenturyLink enters a market with $70 to $80 gigabit they are not lowering prices, and are actually luring customers to pay more than today. It’s an interesting market when even in the most competitive markets the prices don’t really come down.

Is OTT Getting Closer?

Fatty_watching_himself_on_TVThe rumors were running around the industry last week that the FCC was considering an investigation to allow over-the-top video on the web by non-cable companies. FCC Chairman Wheeler dismissed this as something that is being discussed but that is not imminent. But it should be on the table along with a lot of other changes to the way we handle programming.

The rumor wasn’t very specific, as rumors tend to be. One thing that was mentioned was the possibility of requiring that networks owned by cable companies be made available to those who want to broadcast on the web. Specifically mentioned was Comcast which owns the NBC channels and AMC. So perhaps this rumor is tied into the possible merger of Comcast and Time Warner.

But the rumor also implied that the FCC is thinking of classifying OTT providers, on the web or using other medium as cable companies. This would give them the right to buy content and that is a big deal. It was lack of this classification that put Aereo out of business, and giving web-companies these rights would mean a proliferation of customer options for something other than the traditional cable packages.

There are currently several well-known attempts in the industry to break the cable monopoly. It seems to be a universal thought that once somebody is able to create a viable on-line alternative that the flood gates might open up and that all sorts of alternate programming would come to the market. One of the companies trying hard to come up with alternate programming is Dish networks. They own a lot of terrestrial spectrum and have said that they plan to bring an OTT line-up to major markets.

SONY is also working on an alternative OTT line-up and it was reported by Bloomberg News in September that SONY was getting close to a deal with Disney and Fox to go along with an arrangement they already have with Viacom. That would be enough channels to create a very attractive package for cord cutters and millennials who want to get away from the expensive cable packages.

To put this into perspective, the cable companies also want big changes. Consider the petition that Mediacom filed with the FCC last month that asked for an expedited rulemaking to consider various changes in programming rules. Mediacom said that the relationship between programmers and distributors is broken, and they are right. Back at the beginning of the cable industry the cable providers had most of the power since they could decide to carry or not carry any given programming. But over the years as some networks have become indispensable the power has shifted to the programmers.

In recent years the programmers have abused their power. They have increased rates significantly every year, much faster than the rate of inflation. And in doing so they are pushing the price of cable packages to the point where many households are considering alternatives. The programmers also have forced cable systems to take everything they offer if they want to get the better channels. Further, the more powerful programmers often force the cable companies to place a lot of their channels in the most expensive tiers. Recent programming contracts also have minimum penetration rules meaning that cable companies have to pay for a specified percentage of customers even if they don’t actually get those penetration rates.

A lot of this has come about due to industry consolidation and there are six programmers that now own 125 cable networks. And consolidation continues as the Comcast / Time Warner merger would bring more network channels to Comcast.

Mediacom asks for some very specific relief from the FCC. They want the ability to negotiate for channels on an a la carte basis so that they don’t have to take new channels offered or can opt out of the most expensive ones. They also ask for the ability to unbundle, meaning that they are not required to carry everything a programmer offers. Mediacom also asks that the programmers not be allowed to restrict access for putting programming on the Internet for their customers.

Mediacom says in their filing that they expect the programmers to fight vehemently against even opening such an investigation. They said that the programmers will argue that the FCC doesn’t have the authority to implement the changes that they are requesting. But the Mediacom filing lays forth why they think the FCC does have the authority.

At some point something has to give. Perhaps it will come through a generic FCC investigation implied by the rumors. Perhaps a crack will come as part of approving the Comcast / Time Warner merger. Or perhaps somebody like Dish Networks will put together an offering that attracts enough customers to threaten the big cable bundles. But one thing is certain. If nothing changes and cable prices keep soaring, at some point the public will vote with their pocketbooks and we will see a flood of cord cutters finding lower-cost alternatives. The programmers keep acting like that will never happen, but one doesn’t have to remember back very many years to a time when it became trendy to drop home phones and a huge chunk of the market dropped them over a few year period.

The Broken Cable Industry

Fatty_watching_himself_on_TVLast week Mediacom filed a petition asking the FCC asking to open a rulemaking about regulating programmers. The FCC is under no obligation to act on this request, but I hope that they do.

Mediacom makes a point that I totally agree with, which is that the relationship between programmers and distributors is broken. The industry has evolved to the point where the programmers dictate all of the terms for carrying their content. In the early days of the industry the power was mostly with the cable companies. The FCC changed that with the Cable Act of 1992 that required that cable companies to carry local networks. But over time since then the industry has tilted nearly 100% in favor of the programmers.

The power of the programmers is due in a large part because the ownership of content has become concentrated in the hands of a few companies. There are six corporations that together own most of the programming that people think of as part of the cable TV experience. This has happened through mergers and acquisitions, and the situation might get even worse if Rupert Murdock and New Corp is successful in buying Time Warner.

Condensed media power has resulted in the following:

  • Programmers dictate what content cable companies must buy. Each of the six major programmers owns some ‘must see’ channels but each also owns many other channels. Most programming contracts require a cable company to take everything offered by a programmer in order to get the must see channels.
  • Additionally, the programmers dictate where many of the channels must be placed in the line-up. This is why the line-ups of different cable companies look so eerily alike – they don’t have a lot of options about how to create packages from the content they buy. I have one client who recently got into the cable business. They hoped to have a basic lineup of around 60 channels, but the programming contracts instead forced them into carrying nearly 85 channels.
  • The programming rate increases are accelerating. Some of the recent rate increases I have seen are mindboggling. Earlier this year Viacom forced a nearly 100% rate increase over five years upon several cable providers. But the largest rate increases have been for local network channels. Five or six years ago these channels (ABC, CBS, FOX and NBC) were free or nearly free for cable companies. Now most of my clients are paying between $8 and $10 per customer per month just for these networks.
  • To make matters worse for cable companies, the programmers turn around and make a lot of their content available online on a delayed basis to companies other than the cable companies. This means the cable companies pay to carry the content and then see customers watching it somewhere else (with somebody else’s ads).

All of this translates into runaway inflation in cable rates. I’ve seen various industry estimates that the average cable rates by 2020 could be around $200 per month. The high cost of cable is obviously is affecting households and is starting to drive people to find an alternative to the big cable packages.

This is not to say that the cable companies don’t also have policies that are making cable too expensive. For example, they keep increasing rates on settop box rentals and cable modem while also introducing other mysterious charges onto cable bills.

Mediacom has asked the FCC to explore this issue and to find a fix. They call this a broken industry and they are right. The constant large rate increases cannot be sustained and every rate increase is driving more customers away from traditional cable TV.

Mediacom is asking for common sense fixes. They are asking to be allowed to unbundle the programming packages and buy only those channels they want and to then be able to package content to customers in ways that they want to buy it. These changes will require FCC intervention, because right now all of the terms are being dictated by the programmers. Every company that offers cable would benefit by these changes and if the FCC opens a docket I will be making comments.

If the FCC fails to act, I predict that within a few years that the industry will implode. There will become a point where households will abandon cable in sufficient numbers to put that part of the industry into a death spiral. It’s a tricky set of issues and one wonders how much authority the FCC has to make drastic changes without some assistance from Congress. But if nothing is done then the industry is headed over a cliff in the not too distant future.

The Story of the Numbers

I ran across some interesting statistics from the Leichtman Research Group. They track a lot of basic industry statistics and the ones I found most interesting are summaries showing the number of cable and data customers at all of the largest carriers in the industry. Consider the following table that I have created from their statistics:

Data Customers 2013 2012 2011
Comcast 20,662,000 19,366,000 18,143,000
Time Warner 11,606,000 11,395,000 10,909,000
Charter 4,640,000 4,269,000 3,946,000
Cablevision 2,740,000 2,723,000 2,633,000
Suddenlink 1,059,500 1,002,100 948,700
MediaCom 965,000 915,000 851,000
Cable One 472,631 459,235 451,082
Major Cable 42,145,131 40,129,335 37,881,782
AT&T 16,425,000 16,390,000 16,427,000
Verizon 9,015,000 8,795,000 8,670,000
CenturyLink 5,991,000 5,851,000 5,659,000
Frontier 1,836,000 1,724,000 1,702,000
Windstream 1,170,900 1,214,500 1,207,800
FairPoint 329,766 324,977 312,745
Cincinatti Bell 268,400 259,400 257,300
Major Telco 35,036,066 34,558,877 34,235,845
Major Carriers 77,181,197 74,688,212 72,117,627
Cable Customers 2013 2012 2011
Comcast 21,690,000 21,995,000 22,331,000
Time Warner 11,393,000 12,218,000 12,743,000
Charter 4,342,000 4,158,000 4,314,000
Cablevision 2,813,000 3,197,000 3,250,000
Suddenlink 1,177,400 1,211,200 1,249,000
Mediaom 945,000 1,000,000 1,069,000
Cable One 538,894 593,615 621,423
Major Cable 42,899,294 44,372,815 45,577,423
DirecTV 20,253,000 20,084,000 19,885,000
Dish 14,057,000 14,056,000 13,967,000
DBS 34,310,000 34,140,000 33,852,000
AT&T 5,460,000 4,536,000 3,983,000
Verizon 5,262,000 4,726,000 3,981,000
Major Telco 10,722,000 9,262,000 7,964,000
Major Carriers 87,931,294 87,775,815 87,394,423

This table only looks at the major carriers, but in this country that is almost everybody. For example, missing from the table of cable customers are all of the other providers, who altogether only have 7% of the total cable market.

There are some interesting things to notice about these statistics:

  • The number of high-speed data customers continues to grow and the major providers added 2.5 million more customers in both 2012 and 2013.
  • The major cable companies either have or soon will have more data customers than cable customers. This explains why they now view themselves as ISPs who happen to sell cable.
  • The cable companies lost 2.7 million cable customers from 2011 to 2013. This may have more to do with service and competition than anything else since AT&T and Verizon picked up 2.7 million cable customers during that same time period.
  • The Comcast / Time Warner proposed merger is gigantic since those two firms are two of the top three data providers today and two of the top four cable providers.
  • As much effort as the satellite companies expend in advertising they are barely growing. Dish Networks, for example added a net 1,000 customers in 2013.
  • A few companies are really bleeding cable customers and Cablevision and Cable One both lost 14% of their cable subscribers over a two year period. Even Time Warner lost 11%.
  • As well as AT&T and Verizon have done in cable, together they have only grown to be 12% of the cable market.
  • The fastest growing ISPs over the two-year period are Charter (17%), Comcast (13%) and MediaCom (13%).