The Coming Year of Confusion

July 2020 Calendar

I’ve had a number of people ask me about how I think COVID-19 will impact the ISP industry over the next six months. It’s an interesting question to consider because there are both positive and negative trends that ISPs need to be concerned about. The chances are that these various trends will affect markets and ISPs differently – making it that much harder for an individual ISP to understand what they are going to see over the next six months. Following are some of the trends I think ISPs will need to deal with:

People Want Faster Broadband.  Many households came to the realization that their home broadband is inadequate when parents and students tried to work from home simultaneously. OpenVault reported that the number of households subscribing to gigabit service nearly doubled in the first quarter of this year. Clients are reporting an increased demand from first-time customers as well as customers wanting to upgrade to faster speeds.

Downturn in Small Businesses. Everything seems to indicate that a lot of small and medium businesses are not going to survive the pandemic. There have already been a number of businesses like restaurants and small retail stores that have gone under. The anchor stores at malls are failing right and left. There seems to be an expectation that travel-related businesses are going to take a long time to come back. Everything I read says that there is a coming crisis in the fall for business landlords when the finally digest that business tenants are either disappearing or will want to negotiate cheaper rent. That’s likely to have a secondary ripple effect as strip malls and other business landlords start declaring bankruptcy. Over time, new businesses will grow to fill many of the voids, but there has been a huge shift to shopping online that will likely not retreat to pre-COVID levels.

People Will Continue to Work from Home. Every day I read about businesses that say that working from home, at least part time, will become the new normal in many industries. The latest was a survey of law firms that said that a lot of lawyers are not going to return to the office full time when the pandemic is over. This is good news for ISPs that provide residential broadband, because people working from home are going to demand speeds and latency that will support their work. OpenVault just reported that as of the end of the first quarter of 2020 that the percentage of homes subscribing to gigabit broadband doubled over the last year and is now at 3.75% of all homes and growing rapidly. This is not such great news for ISPs that serve law offices.

The Big Unknown is the Impact of Unemployment. As businesses fail or downsize a lot of people are not going to be returning to their original job. ISPs are already reporting that people are ditching telecom products like landlines. The cord cutting in the last month of the first quarter of this year was record-setting. The big unknown will be the number of households that can no longer afford to buy landline broadband. Obviously, unemployment isn’t going to stay at the current 40 million people, but it’s not quickly going to return to pre-COVID levels. A secondary impact of a degraded economy will be a surge in bad debt as customers hang onto to home broadband as long as they can. We’re likely to see a big impact when the Keep America Connected pledge ends. If ISPs present a bill for multiple back months of billing we ought to see a lot of customers forced to default and cancel broadband.

The Pandemic is the Dagger That Will Finally Kill DSL. Homes that have an option of using DSL or something faster like cable broadband or fiber are going to be bailing on DSL in big numbers. Many people in towns have stuck with DSL because it is priced cheaper than cable broadband. However, for a lot of homes, the most important factor in broadband has become speed and performance.

The Rural Broadband Gap Will Keep Getting Headlines. COVID-19 made it clear to elected officials at all levels of government that the rural broadband gap is badly hurting the economy. Even if schools return to normal, businesses in rural areas are not going to have the same flexibility to send employees home, and unemployed people in rural area are not going to easily be able to accept at-home jobs. That’s going to keep a sizable slice of the economy from fully participating in any recovery. Almost everybody I talk to is hopeful that this might translate to increased grant money for rural broadband – but that’s no guarantee.

We’re Going to Have Unexpected Shortages in the Supply Chain. The best way to describe the supply chain right now is spotty. Manufacturers of telecom electronics are going to suddenly find they can’t buy one or two components, and manufacturing will come to unexpected halts. Anybody building a broadband network needs to expect delays, and if history is a good teacher, the delays will last longer than expected. This is going to play havoc with anybody that has financed a new network and needs to install customers to meet debt payments.

Banks Are Going to Tighten Lending. It’s inevitable that as banks digest bad loans from failing businesses that they are going to get more cautious about making new loans. Even if interest rates don’t rise, banks will do what they always do under stress and get more conservative. Some local banks are likely to get into real trouble and will fail if their portfolio was heavily invested  into businesses that are failing.

This all makes for an interesting short-term future. There will be more people yelling for faster broadband at the same time there will be more customers unable to afford broadband. There will be grants awarded for rural markets at a time when banks might not provide the matching funds. All in all, it’s going to be a mess for most ISPs who will see both good and bad things affecting them at the same time.

 

 

 

 

The Fragile Supply Chain

The recent outbreak of the coronavirus reminded us how fragile the supply chain is for telecom. As it turns out, the Hubei province of China is where much of the world’s optics and lasers are built that are the key component in every device that is used to communicate in a fiber network. Within days after the reality of the virus become apparent, the stocks of tech companies that rely on lasers took a hit.

The supply chain for electronics manufacturing stretches worldwide. The lasers are made in one place. The chips in devices are made somewhere else. Other electronic components come from a third geographic source. Components like cellphone screens and other non-electric components come from yet a different place. And the raw materials to make all of these devices come from markets all over the world.

The virus scare made the world wake up to the fragility of the supply chain. Without lasers, there would be no fiber-to-the-home devices manufactured. There would be no new servers in data centers. There would be no new small cell sites built or activated. Major industries could be brought to their knees within weeks.

It’s not hard to understand why I say the supply chain is fragile. Consider smartphones. There are probably a dozen components in a smartphone that must be delivered on time to a smartphone factory to keep the manufacturing process going. If any one of those components can’t be delivered, smartphone manufacturing comes to a halt. The manufacturing floor can be crippled by a lack of screens just as much as it can suffer if the chips, antennas, or other key electronic components become unavailable.

It’s impossible to know if the coronavirus will cause any major disruption in the supply chain for fiber optics – but the point is that it could. If it’s not a virus today, disruptions could come from a wide range of natural disasters and manmade problems. I remember a fire that destroyed a fiber optic cable factory a few decades ago that created a major shortfall of optic cables for a year. Floods, fires, earthquakes, and other disasters can knock out key manufacturing sites.

Manmade disruptions to the supply chain are even easier to imagine. We saw the price of electronics components shoot up over the last year due to tariff battles between the US and China. The supply chain can be quickly cut if the country making devices goes to war, or even undergoes an ugly regime change. It’s also now possible to weaponize the supply chain and threaten to cut off key components when negotiating other issues.

I’m sure that very few Americans realized that the Wuhan region has a near-monopoly on the manufacture of lasers. A worldwide economy rewards the creation of monopolies because components are cheapest when an industry takes the most advantage of the economy of scale. The companies in the Wuhan region can likely manufacture lasers cheaper than anybody else.

From a strategic position, countries like the US should foster their own industries to manufacture vital components. But that’s not easy or practical to achieve. A new US company trying to compete on the world stage by making lasers is likely to be more expensive and unable to compete when the supply chain is humming at normal capacity. It’s hard to picture creating a competitor to the Wuhan region that can manufacture lasers in the quantities, and at a price the market is willing to pay.

In the long run, the world always finds alternate solutions to any permanent changes in the supply chain. For example, if China is ever unable to export lasers, within a few years other countries would pick up the slack. But the fiber industry would be devastated during the lull needed to find a new source of components. Bank of America reported last year that 3,000 major manufacturing companies were already reconsidering their supply chain due to tariff and other concerns. Some of these companies, particularly electronics companies have been considering bringing production back to the US now that factories can be heavily robotized. I’m sure the coronavirus has accelerated these decisions.