Merger Madness

The last year was a busy one for mergers in the industry. We saw Charter gobble up Time Warner Cable and Bright House Networks. We saw CenturyLink buy Level 3 Communications. But those mergers were nothing like we see on the horizon right now. I can barely read industry news these days without reading about some rumored gigantic acquisitions.

There have always been mergers in the industry, but I can’t remember a time when there was this level of merger talk happening. This might be due in part to an administration that says it won’t oppose megamergers. It’s also being driven by Wall Street that makes a lot of money when they find the financing for a big merger. Here are just a few of the mergers being talked discussed seriously in the financial press:

Crown Castle and Lightower. This merger is already underway with Crown Castle paying $7.1 billion for Lightower. It matches up two huge fiber networks along with tower assets to make the new company the major player in the small cell deployment space, particularly in the northeast.

Discovery and Scripps. Discovery Communications announced a deal to buy Scripps Networks for about $11.9 billion. This reduces the already-small number of major programmers and Discovery will be picking up networks like the Food Network, HGTV, Travel Channel, the Cooking Channel and Great American Country.

Comcast, Altice and Charter. Citigroup issued a report that speculates that Comcast and Altice would together buy Charter and split the assets. Comcast would gain the former Time Warner cable systems with the rest going to Altice. There is also talk of Altice trying to finance the purchase of Charter on its own. But with Charter valued at about $120 billion while also carrying around $63 billion in debt that seems like a huge number to finance. This would be an amazing merger with the ink not yet dry on Charter’s merger with Time Warner.

Amazon and Dish Network. This makes sense because Amazon could finally help Dish capitalize on its 700 E-block and AWS-4 spectrum licenses. This network could be leveraged by Amazon to track trucks and packages, monitor the IoT and to control drones.

T-Mobile and Sprint. Deutsche Telecom currently owns 63% of T-Mobile and Softbank owns 82% of Sprint. A straight cashless merger would create an instantly larger company and gain major operational advantages. The FCC and the Justice Department nixed a merger between T-Mobile and AT&T a few years back, but in an environment where the cellular companies are getting into the wireless business this might sail through a lot easier today. Sprint has also been having negotiations for either a merger or some sort of partnership with Comcast and Charter.

Comcast and Verizon. There is also Wall Street speculation about Comcast buying Verizon. The big advantage would be to merge the Comcast networks with the Verizon Wireless assets. Comcast has a history of buying companies in distress and Verizon’s stock price has dipped 17% already this year. But this would still be a gigantic merger worth as much as $215 billion. There are also some major regulatory hurdles to overcome with the big overlap in the northeast between Comcast and the Verizon FiOS networks.

Unlimited Cellular Data Pricing

SONY DSCI recently wrote a blog about how all of the cellular companies are now offering unlimited data plans. Today I’m going to look at their plans in some detail to discuss what they really mean by “unlimited.”

AT&T. AT&T now has two unlimited plans. Unlimited Choice starts at $60 for one phone with unlimited voice, text and data. It’s $55 for a second line and $20 each for lines up to ten. There is an extra fee of $5 per month for one line or $10 for multiple lines if the customer doesn’t elect autopay. Data comes with lots of limits. Video is capped at 480p standard resolution. Total download speed is limited to 3 Mbps with video capped at 1.5 Mbps, regardless of the quality of the 4G stream available. And while there is no data cap, AT&T starts throttling data speeds for the month when a customer hits 22 GB of download. And last – and what will be a killer for most potential customers – it doesn’t allow tethering.

The Unlimited Plus plan starts at $90 for the first phone. It also includes a penalty for not using autopay. It undoes all of the speed restriction of the choice plan and can stream HD video. It also allows up to 10 GB per month for tethering. It has the same monthly cap of 22 GB before the data gets throttled. This still is not an alternative for home use because of the 10 GB cap on tethering. But it’s a good business travel plan. And a home user with a tablet might find this to be a good, if expensive, broadband alternative.

Verizon. Verizon’s unlimited plan is $80 for the first phone, $60 for a second, $22 for a third and $18 for a fourth. This also has unlimited voice and text. The data has a very unusual daily cap and speeds get throttled after hitting 500 MB download in a day. There is also a monthly cap of 22 GB, after which all data gets throttled. There is a 10 GB monthly allowance for tethering, with speeds throttled to 3G after hitting that cap. Verizon allows HD video streaming.

T-Mobile. T-Mobile’s plan is priced at $70 for the first phone, $30 for a second, $41 for a third and $19 for a fourth. This also has unlimited voice and text. There is a monthly cap of 28 GB after which data gets throttled. There is a 10 GB monthly allowance for tethering, with speeds throttled to 3G after hitting that cap. T-Mobile allows HD video streaming.

Sprint. Sprint’s plan is priced at $50 for the first phone, $40 for a second. But these are promotion prices and the company warns they will probably price to ‘market’ after March 31. This also has unlimited voice and text. There is a monthly cap of 23 GB after which data gets throttled. There is a 10 GB monthly allowance for tethering, with speeds throttled to 2G (which has been discontinued in much of the country) after hitting that cap. Note that at 2G you can’t even read email, so this is effectively a hard cutoff.  Sprint allows HD video streaming capped at 1080p quality.

Various Issues. There are activation fees to consider with some of the companies. AT&T and Sprint charge $25 and Verizon $30. T-Mobile has no activation fee. T-Mobile also includes all taxes and fees in its price, something that can be fairly expensive in some parts of the country.

None of these plans is truly “unlimited” and I won’t be shocked to see the Federal Trade Commission going after all of these carriers for advertising them that way. Certainly none of these are going to be a good alternative for home broadband, except perhaps for rural customers with no better alternative. But I think even rural users will find the cap on tethering and the throttling after a fairly stingy amount of download to be impossible to live with. It’s a shame because many rural homes using traditional cellular broadband have monthly bills of $500 to $1,000.

Interestingly, I just saw yesterday that some Wall Street analysts are slamming Verizon because they fear that their network cannot handle these new ‘unlimited’ plans. But as you can see these plans are not unlimited. They are effectively capped at 2 – 3 times the size of existing family plans, that that assumes that customers will use all of the allotted data-  which many will not. There is already plenty of excess capacity to handle this at the vast majority of cell sites. And this isn’t going to much hurt the cell sites that are already over-busy.

For customers that routinely go over the current cellular data caps these might be a great alternative. Current cellular data is priced at $10 per gigabyte and these plans have reduced data prices to a more affordable price under $2 – $3 per gigabyte for somebody that uses the full allowance. But compared to traditional plans these plans all have hard monthly caps – and while those caps are at 22 GB or higher, they are effectively hard caps since data gets throttled and becomes largely unusable after hitting the cap. These plans will all tease you into watching a lot of video and then penalize you heavily for watching too much.

A Year of Changes

fast fiberI can’t recall a time when there were so many rumors of gigantic changes in the telecom industry swirling around at the same time. If even half of what is being rumored comes to pass this might be one of the most momentous years in the history of telecom. Consider the following:

Massive Remake of the FCC.  Ajat Pai has been named as the interim head of the FCC, but it’s been said that the president is already referring to him as the Chairman. We know that Pai was against almost every initiative of the Wheeler FCC and there are expectations that things like net neutrality and the new privacy rules will be reversed or greatly modified.

There are also strong rumors in the industry that the new administration is going to follow the advice of the transition telecom team of Jeff Eisenach, Roslyn Layton and Mark Jamison. That team has proposed the following:

  • A reapportionment of ‘duplicative’ functions at the FCC. Functions like fostering competition and consumer protection, for example would be moved the Federal Trade Commission.
  • A remake of telecom rules to remove ‘silos.’ For as long as I can remember we’ve had separate rules for telcos, cable companies, wireless companies and programmers. That probably made sense when these were separate industries, but today we see all of these business lines about to converge within the same corporation like Comcast or AT&T. The transition team says it’s time to change the rules to reflect the reality of technology and the marketplace.

At this point I’ve not seen any specific proposals on what those streamlined rules might be. And Congress will have to take an active role in any changes since the current FCC responsibilities are the results of several major telecom and cable acts.

Verizon Looking to Buy a Cable Company. It’s been reported that Lowell McAdams, the CEO of Verizon, has told friends that the company will be looking for a cable acquisition to boost demand for its wireless data. McAdams also talked to analysts in December and described how Charter might be a natural fit with Verizon. There is also speculation on Wall Street that Comcast could be the target for Verizon.

Mergers of this size are unprecedented in the industry. Charter has over 20 million residential data customers and is second behind Comcast’s 23 million data customers. And both companies now have a significant portfolio of business customers.

I remember a decade ago when AT&T started buying back some of the RBOCs that had splintered off during divestiture back in 1984. We all joked that they were slowly putting Ma Bell back together. But I don’t think anybody ever contemplated that the biggest telcos would ever merge with the cable companies. That would remove the last pretense that there is any competition for broadband in urban areas.

More Merger Mania. At one point it looked like the new administration would be against the AT&T and Time Warner merger. But Wall Street now seems to be convinced the merger will happen. The merger will likely come with the typical list of conditions, but we know from past experience that such conditions are only given lip service. AT&T has already taken a strong position that the merger doesn’t need FCC approval. That would mean that most of the government analysis would come from the Justice Department. Just like with the rumored Verizon acquisitions, this merger would create a giant company that operates in all of the FCC-controlled silos. We don’t really have an effective way today to regulate such giant companies.

Verizon might need to hurry if it wants to buy a giant cable company since there is a rumor that Comcast, Charter and Cox plan to go together and buy T-Mobile. That makes a lot more sense than for those companies to launch a wireless company using the Verizon or AT&T platform. Such an arbitrage arrangement would always allow the wireless companies to dictate the terms of using their networks.

Unlimited Cellular Data

SONY DSCAll four major wireless carriers have been in the news recently concerning unlimited wireless data plans. The unlimited plans get even more intriguing when you consider that the upcoming FCC is likely to be hands off and may allow the carriers to have zero-rating plans. With zero-rating the carriers will give customers unlimited data for the carrier’s own content, but put limits on all other data.

There has also been a lot of talk this year in the industry that people are dropping landline data plans and migrating back to cellphone data. But when you look at the plans available to customers it’s hard to see any of these plans being competitive with good landline data (emphasis on good). Here are the unlimited data plan options of the four big wireless carriers:

Verizon is the easiest to understand and they hate unlimited data plans. They had unlimited plans years ago and worked hard to migrate customers off unlimited data. But about 1% of Verizon customers are still on these plans. The company recently notified customers who actually use their unlimited data that they are going to be disconnected unless they migrate to a suitable plan. And by suitable, the company offers a plan with 100 GB of download for $450 per month. This means that only a customer who doesn’t use their unlimited plan will be allowed to keep it.

AT&T introduced a new unlimited data plan this year, but it has a lot of strings attached. For example, customers of this plan are not allowed to create mobile hotspots for their laptop or tablets. For anybody that travels a lot like me, this is my primary use of mobile data and there are still many hotels around where the bandwidth is barely adequate to read emails. The AT&T unlimited plan also allows the company to throttle customers in two instances – if they are in a congested area or if they exceed 22 GB per month of download. To put that into perspective, my family of three cord-cutters used 660 GB of data last month – so it’s hard to think of 22 GB as ‘unlimited.’ AT&T’s plan is not cheap and costs $60 for the data plus $40 per phone, meaning it costs $100 per month for a single user.

Sprint and T-Mobile both came out with unlimited plans at the end of the summer. Sprint’s ‘Unlimited Freedom’ plan costs $60 for the first line, $40 for the second and $30 per additional line up to ten lines. Sprint’s unlimited plan doesn’t allow HD video and streams all video in standard definition. They also restrict music steaming to 500 kbps and gaming to 2 Mbps.

T-Mobile’s unlimited plan costs $70 for the first user, $50 for the second and $20 after that up for to eight users. T-Mobile is probably the least restrictive of the four companies. Their only restriction on the unlimited data is that they stream video in standard definition. But for $25 more per month customers can get HD video.

The big caveat on all of these plans is that LET data speeds in the US are among the slowest among developed countries. The OpenSignal report this year ranked the US at 55th in the world, placed between Russia and Argentina, at an average speed just under 10 Mbps.

I read a lot of news articles on my phone when traveling using Flipboard – a news site that lets me customize my news feed. Reading articles on my smartphone is the one part of my digital world that is still agonizingly slow. I often have to wait for 30 seconds or more for a news article to open – and it reminds me of the days when trying to open files back in the dial-up days.

The restrictions on these plans really highlight the hypocrisy of zero-rating. These carriers don’t want you to use their cellular data because they say it harms their network. And yet they are perfectly okay with letting customers view company-supplied content all day without restriction. This, more than anything, tells us that cellular data caps and other restrictions are all about making money and not about the network.

It’s still hard to think of any of these plans as a substitute for a landline connection. A cellular data plan like T-Mobile’s might make sense for somebody who is always on the go and not physically in one place very often. These plans are not cheap and I can certainly see households having to make a choice between a landline connection and a cellular plan. My gut tells me that any migration of landline customers to mobile-only data is probably a lot more about family economics than it is about being happy with one of these cellular data plan.

A Year of Mergers

Bell_logo_1969Our industry has seen many mergers over the years between the biggest companies in the sector. But for the most part big mergers that change the face of the industry have been sporadic. We had AOL buying Time Warner in 2000, Alcatel buying Lucent in 2006 and CenturyLink buying Qwest in 2011.

But now it seems like I can’t read industry news without seeing discussions of a new merger. During the last year or so we saw AT&T gobble up DirecTV, saw Alcatel-Lucent grabbed by Nokia and saw Charter buy Time Warner Cable and Bright House Networks. And we are now watching the regulators sorting out mergers with Verizon trying to buy both XO Communications and Yahoo, with CenturyLink wanting to buy Level 3 Communications and AT&T wanting to acquire Time Warner.

From reading Wall Street speculation it seems like the current merger mania in our industry is not over. The rumors are strong that CBS and Viacom will soon announce a merger. There is rampant speculation that several companies might try to outbid CenturyLink for Level 3. There are rumors that Comcast, Charter and Altice are interested in buying T-Mobile or Sprint. There are continuing rumors that Verizon wants to buy Dish Networks to get permanent access to the huge swatch of spectrum they own. And there have been rumors for the last year that somebody ought to buy Netflix.

And these giant mergers aren’t just happening in telecom. We see Bayer buying Monsanto, Microsoft buying Linked-In, Marriott buying Starwood, Tyco buying Johnson Control, Protection 1 buying ADT, Sherwin-Williams buying Valspar and Fortis buying ITC Holdings.

It’s really hard in the telecom world to know if mergers are good or bad for the industry. Some mergers are clearly bad because they eliminate competition and create oligopolies at the top of the market. The rumored merger between CBS and Viacom is one such merger. Today there are only five major programmers in the country and this reduces that to four. A lot of the woes in the industry today are due to the greed of programmers and consolidation at the top of the industry can’t mean anything good.

But other mergers might be beneficial. Consider the impact of Comcast or Charter buying T-Mobile or Sprint. I just saw an article this week that showed that the wireless operations of AT&T and Verizon are still showing a gross margin of over 50%. It’s been clear to every consumer that cellular service is overpriced due to lack of meaningful competition. Perhaps one of the big cable companies could drive down cellular prices in an attempt to grab market share.

But on the flip side, letting these huge cable companies develop a quad play product is bad for anybody else that tries to compete with them for broadband. A new fiber overbuilder in a city would have an even bigger challenge if they try to displace a cable competitor that offers cellphone service bundled with their broadband. It’s been clear for a long time that lack of broadband competition is bad for consumers.

The underlying theme driving all of these mergers is that Wall Street has a never-ending appetite for increased earnings. That alone is often a good thing. Many times the companies being acquired are underperforming for some reason and mergers sometimes wake them up to do better. Many mergers promise improvement earnings due to the effects of consolidation and a reduction in the management and overhead drags.

But consider what mega-mergers in the telecom space more often mean. They mean that fewer and fewer companies control the vast majority of the market. And those giant companies are driven by Wall Street to increase earnings quarter after quarter forever – and at a pace and level that exceeds general inflation. You only have to do the math on that basic concept to realize that this means price increases for residential and business customers year after year to keep meeting higher earnings targets.

Years ago we had Ma Bell that controlled 95% of the phone business in the country. AT&T would have acted like any other commercial company except for the fact that their prices were heavily restricted by regulators. But stockholders of these big companies today do just the opposite and they pressure management to increase profits no matter the consequences. It is the chase for bigger earnings that has seen programming costs and cable TV rates climb much faster than inflation for the last decade to the point where the cable TV product costs more than many households are willing to pay.

I doubt we will see the end to these mergers, but if we don’t find a way to curb them the inevitable results will be a tiny number of companies controlling the whole sector, but with none of the restrictions in the past that were put on companies like Ma Bell. It scares me sometimes to think that broadband rates are going to increase in the same manner that cable rates increased in the past. But when you look at what the big ISPs have to sell it’s hard to not picture a scenario where earnings pressures are going to do the same thing to broadband that has been done to cable rates. That is going to do great harm the country to the benefit of the stockholders of a few big companies.

Will We See Net Neutrality Enforcement?

Network_neutrality_poster_symbolThe FCC has not yet taken any direct action to enforce its new net neutrality decision. There have already been several ways that the agency has begun to use its new authority to regulate broadband under Title II regulation. But the agency has yet to directly act on the core issue of net neutrality.

It’s likely that the FCC was waiting for the courts to first resolve the challenges to the net neutrality ruling. Otherwise, anything they ordered might have been overturned by a negative court decision. But earlier this year the courts affirmed the FCC’s net neutrality order, and so it now seems to safely be the firm law of the land.

The basic premises of net neutrality are that the Internet is to be open and there is to be no blocking, throttling or paid prioritization by ISPs. There are a number of ISPs that have practices that seem to be a violation of the paid priority prohibition. For instance, the major wireless companies have plans to not count some video transmission as part of monthly data caps. The companies refer to these as ‘sponsored data’ and I they hope that somehow will excuse the practices from the net neutrality rules.

T-Mobile probably has the most egregious plans. The company has made arrangements with various content providers and over 100 video services are now available as part of its Binge On plan. This allows users to watch services like ABC, ESPN, Disney, NBC, Hulu, Netflix and Sling TV on their smartphones without the usage applying to monthly data caps.

Verizon has a more modest plan called Go90 which offers some unique content for Verizon cellphone customers that is not available anywhere else. This content is also exempt from data charges. But this might become a moot point since there have been several recent articles saying that the offering has gotten no traction with customers. But Verizon also just announced this week that they plan to zero-rate football games streamed to cellphones under the NFL Mobile app.

AT&T just announced a plan that looks to fall into the gray area. The company is going to start zero-rating the DirecTV app so that customers who buy both DirecTV and AT&T cellular service can watch the service on their cellphones without data charges. Their reasoning is that these are premium customers that already have a significant monthly bill from AT&T and that those bills cover the service. The company has plans to majorly revamp the DirecTV apps later this year and there is likely to be more of these package arrangements.

Comcast also has a questionable service. They send their TV anywhere content to customers outside of their monthly data caps. They have argued that they are using a technology that uses a separate data path than normal broadband, but it still seems to fail the net neutrality test. Comcast recently significantly increased its data caps which alleviates a lot of the concern, but there still must be customers who are going over the higher caps.

I’m thinking it’s highly unlikely that this FCC is going to tackle these issues. It’s likely the current Chairman will be replaced soon after the new year and the agency already has a number of other important proceedings it wants to wrap up soon, such as the current cellular auctions.

So this is probably going to be deferred for the next FCC chairman. And that means we’ll have to wait to see if that will be a democrat or a republican. It’s unlikely that a republican FCC would enforce net neutrality, and we can’t even be certain that a democratic chairperson would tackle the above issues.

I find it a little ironic that these issues are what supposedly prompted the net neutrality ruling, and yet nothing has been done. But the path chosen by applying Title II regulation to broadband opens up a ton of new topics for the FCC to consider like broadband privacy, data caps, truth in labeling and all sorts of other regulations associated with bandwidth products. And that’s where this FCC puts its attention this year.

Shake-up In the Cellular Industry

SONY DSCWe are on the verge of seeing a shake-up of the cellular industry. It makes me chuckle every time I think about how AT&T and Verizon pulled off having us turn off landlines costing $35 dollars per month and swapping them for a plan whereby each individual family member pays $40 – $60 per month. But the lure of mobility lured us to cellular phones and the smartphone sealed the deal.

AT&T and Verizon have both made huge profits by selling mobile voice at high rates. I suspect the average cellphone user doesn’t use that many traditional long distance minutes and are probably paying 5 to 10 cents per minute for their cellular long distance. And the cell companies have virtually no cost from selling text messages and yet include a hefty charge for the service (bundled and hidden) in our bills each month. The price we pay for cellular data makes it among the most expensive bandwidth in the world.

But the best of times are close to over for these two big companies and there are numerous pressures that are going to cut into profits:

Top of the Demand Curve. Basically everybody in the US that wants a cellphone has one. The industry is saturated to the point where the industry as a whole can only grow by organic growth with the population rate.

Cable Company Competition. Comcast has announced that it is getting into the cellular business and will bundle it with its other products. For now Comcast will be relying on resold minutes from the Verizon network, but the company is also now bidding for spectrum in the current FCC auction. Charter has the same contractual relationship to buy Verizon minutes and is said to be contemplating a cellular product as well. Analysts are predicting that these two companies could gain a 20% market share after a few years in the business. There is also speculation that one of these companies will try to acquire T-Mobile as a way to jumpstart the cellular business.

WiFi Phones. There is a real move in urban areas to sell WiFi phones where most calling is placed over WiFi rather than over the cellular networks. It turns out that most people spend the majority of their time within range of WiFi, and there are already carriers offering inexpensive plans that bundle regular cellular minutes with WiFi calling. This trend is also growing due to the proliferation of public WiFi. Google has deployed WiFi kiosks all over New York City. Comcast has deployed millions of hot spots and enabled WiFi in neighborhoods using customer cable modems.

Increased Competition. The two big companies are seeing increased competition from competitors, mostly T-Mobile, but also a number of resellers. T-Mobile is growing rapidly and added over 1.9 million net customers in the second quarter of this year – and for the thirteenth consecutive quarter they have added over 1 million customers. For the longest time the two big companies dominated the market, but competition is finally eating into their near-monopoly. Probably the biggest consequence of competition is that we are now seeing the average revenue per cellular customer drop overall for the first time.

What’s Next for Cellular Companies? None of these trends are necessarily doom and gloom for the big cellular carriers if they can find new uses for their spectrum. And that’s where they are looking for growth. AT&T and Verizon are counting on revenue streams from new markets like connected cars and the Internet of Things to replace what they are losing in cellular revenue. And they are banking on 5G making them relevant in the broadband world.

But it’s clear that the days of pocketing huge profits from cellular voice is fading and the industry as a whole is going to have to look elsewhere for long-term profits.

The Anti-Competitive US Marketplace

President_sealThe US Council of Economic Advisers released a report on April 15th that cited examples of anticompetitive market power throughout many sectors of the US economy. The report says that in many sectors of the economy that the fifty largest companies control more of the market today than they did in 1997.

The conclusion of the report is that industry concentration has an overall negative impact on the economy. The largest companies in each industry tend to erect barriers that squelch start-ups, thwarts innovation and discourage real competition.

The president used this report to issue an executive order on April 30 that instructs all executive agencies and departments to submit a plan within 30 days of ways that they can promote competition. I don’t hold out a lot of hope of success for this action due to the fact that we are now deep into the last year of this presidency. But it’s still refreshing to see the government acknowledge that competition is better for our economy than having an economy controlled by large companies with huge market power.

There are few industries that demonstrate the negative aspects of anti-competitive behavior than telecom. The cellular part of the industry is probably the worst since four companies have the vast majority of customers in the country. There are not a lot of other cellular companies that own their own spectrum and many competitive alternatives to the big four, like Cricket, actually ride the networks of the bigger companies and buy wholesale minutes from them.

But right behind the concentration of cellular companies are the ISPs. A handful of largest cable companies and telcos have more than 90% of the broadband customers in the country. And even in markets where these providers overlap, the competition between these large companies can best be characterized as duopoly competition where the companies charge roughly the same prices and don’t compete in any meaningful way.

The only broadband markets in the country that have real competition are those where some outside party has entered the market with a competing network. That might be a municipal provider or else one of the handful of commercial providers that are building competitive networks.

Earlier this week I wrote about how the largest ISPs all attack municipal competition and the reason for this is clear. They don’t want there to be success stories where it can be shown that a city was effectively able to take over a market – because such an idea could spread to a whole lot of other cities.

The report goes on to show that government sometimes has been able to curb some of the worst abuses of anti-competitive behavior. There were a few government actions touted in the report as positive steps the government has taken to promote competition. One big action in the telecom space was blocking of the merge between AT&T and T-Mobile. Another was the FCC’s order of net neutrality and of placing broadband under Title II regulation.

But the feds also sometimes get it wrong. Right now the FCC is using the excuse of lack of competition as the motivation for ordering an opening of the settop box market. But I talk to folks in the industry all of the time and nobody I talk to thinks that settop boxes are much of a concern. If anything, the feeling is that new technology will naturally kill settop boxes and eliminate the need for them.

I was relieved to see the merger between Comcast and Time Warner die, but we are still seeing consolidation in the cable industry and the largest companies are getting more powerful. There is very little positive that can be gained from the Time Warner and Charter merger. And it’s always been disturbing to see large ISPs that also own programming content. That alone gives Comcast a huge advantage over anybody that tries to compete against them.

I don’t know how anybody can undo the consolidation in this industry. The big companies have locked up the market and the cost to build new networks to compete against them is a major barrier to entry. But perhaps having new networks built by municipalities and other commercial providers will chip away at enough of the market over time to make a difference.

 

T-Mobile and Comcast Challenge Net Neutrality

Network_neutrality_poster_symbolBoth Comcast and T-Mobile have developed video plans that seem to be a direct challenge to network neutrality. In both cases they are playing favorites with video services in an environment where both carriers have data caps. I find it interesting that they would challenge the FCC in this manner while net neutrality is still being decided by the courts. Even should the FCC look at these cases, any decisions they make could be later changed by the court ruling. Carriers in general hate uncertainty and usually shy away from tackling regulatory matters that are under court review.

Comcast has come out with a skinny bundled they are calling Stream TV. It is being tested now in a few markets. The new service includes CBS, NBC, ABC, FOX, the CW, Univision, Telemundo, and HBO. It does not include the more popular cable networks like ESPN or AMC. The monthly price is $15, which is interesting since HBO NOW is sold at that same price if you buy it from HBO. It’s available only to Comcast broadband customers – it’s starting now in Boston and Chicago but should be available in the whole Comcast footprint by early 2016.

The service can be watched on any device in a home connected to the XFINITY network, but does not come to the Comcast settop box. A customer could watch it on a smart TV or by using Roku, Apple TV or similar devices. Comcast says this is a product aimed at cord cutters and at young viewers who don’t want to sit in front of a television. Everybody has been expecting these kinds of offerings from the big cable companies as a way to keep cord cutters sending them a monthly check.

There are two regulatory issues with this new offering. The first is that it does not fit into the scheme of the prescribed kinds of lineups defined by various cable laws enacted by Congress. It comes closest to being a basic cable line-up since it includes the network channels, but it excludes things like PBS and local government access channels. I think Comcast is trying to get around this by having this not delivered to the settop box. It’s instead delivered on the IP path. But there still seems to be room for a challenge to the legality of the offering because the various federal rules on cable tiers are silent about technology differences and the same sorts of line-up requirements apply to somebody like a Verizon FiOS network.

The net neutrality problem comes because Comcast is not going to count the bandwidth from the Stream TV service against their newly established 300 gigabit per month data caps, which are being trialed in a few markets but are expected everywhere. That seems to be a direct slap in the face to the FCC since net neutrality rules prohibit favoring your own products over those of competitors. It’s really hard to see how this can be allowed to stand. Watch Comcast without a data cap or some other alternate provider like Hulu and it counts against the cap.

The T-Mobile product takes a totally different tactic. T-Mobile has rolled out their own skinny bundle called Binge On. The product includes a wide range of channels like ESPN, HBO, Netflix, Showtime, and Hulu with a total of 23 choices. Customers must buy each of these separately, and the beauty of that is that customers get to put together their own skinny bundles of just what they want to watch.

The net neutrality issue is that none of the video viewing will count against a T-Mobile customer’s data cap. On quick glance that doesn’t look to be discriminatory since there is a wide range of possible programming to buy. But the rub comes in that if a customer watches other video on their phone from a site that is not part of the package then it counts against their cap.

This means that T-Mobile is picking winners and losers for video streaming. They are allowing a small handful of programming to be unmetered but exclude the other thousand sources of video. This exact situation was discussed by the FCC when they first proposed the new net neutrality rules and their worry was that allowing carriers to pick winners and losers would result in stifling new innovation on the web. If all of the carriers mimicked T-Mobile then a new video offering would have a huge uphill battle and we would have an oligopoly of a handful of the largest video providers.

Interestingly, FCC Chairman Tom Wheeler said that he didn’t see any problem with what T-Mobile is doing and that it sounded “highly innovative and highly competitive.” I don’t think that the video providers not included on the T-Mobile list agree with that, nor should they. It’s not hard to picture every large ISP making similar deals with the current OTT providers like Netflix, Hulu, and a few others and effectively shutting out any future new video providers from the majority of customers in the US.

Google’s Experiment with Cellular Service

Wi-FiAs I’m writing this (a week ago), Google opened up the ability to sign-up for its Project Fi phone service for a 24-hour period. Until now this has been by invitation only, limited I think by the availability of the Google Nexus phones. But they are launching the new Nexus 5X phone and so they are providing free sign-up for a 24-hour period.

The concept behind the Google phone plan is simple. They sell unlimited voice and text for $20 per month and sell data at $10 per gigabit as it’s used. The Google phone can work on WiFi networks or will use either the Sprint or T-Mobile networks when a caller is out of range of WiFi. And there is roaming available on other carriers when a customers in not within the range of any of the preferred networks.

Cellular usage is seamless for customers and Google doesn’t even tell a customer which network they are using at any given time. They have developed a SIM card that can choose between as many as 10 different carriers although today they only have deals with the two cellular carriers. The main point of the phone is that a customer doesn’t have to deal with cellular companies any longer and just deals with Google. There are no contracts and you only pay for what you use.

Google still only supports this on their own Nexus phones for now although the SIM card could be made to work in numerous other phones. Google is letting customers pay for the phones over time similar to what the other cellular carriers do.

Google is pushing the product harder in markets where it has gigabit networks. Certainly customers that live with slow or inconsistent broadband won’t want their voice calls routing first to WiFi.

The main issue I see from the product is that it is an arbitrage business plan. I define anything as arbitrage that relies on using a primary resource over which the provider has no control. Over the years a lot of my clients are very familiar with other arbitrage plans that came and went at the whim of the underlying providers. For example, there have been numerous wholesale products sold through Sprint like long distance, dial tone, and cellular plans that some of my clients used to build into a business plan, only to have Sprint eventually decide to pull the plug and stop supporting the wholesale product.

I am sure Google has tied down Sprint and T-Mobile for the purchase of wholesale voice and texting for some significant amount of time. But like with any arbitrage situation, these carriers could change their mind in the future and strand both Google and all of their customers. I’m not suggesting that will happen, but I’ve seen probably a hundred arbitrage opportunities come and go in the marketplace during my career and not one of them lasted as long as promised.

It’s been rumored that Apple is considering a similar plan. If they do, then the combined market power of both Google and Apple might make it harder for the underlying carriers to change their mind. But at the end of the day only a handful of companies own the vast majority of the cellular spectrum and they are always going to be the ones calling the shots in the industry. They will continue with wholesale products that make them money and will abandon things that don’t.

There are analysts who have opined that what Google is doing is the inevitable direction of the industry and that cellular minutes will get commoditized much in the manner as long distance in the past. But I think these analysts are being naive. AT&T and Verizon are making a lot of money selling overpriced cellular plans to people. These companies have spent a lot of money for spectrum and they know how to be good monopolists. I still laugh when I think about how households that used to spend $30 to $50 per month for a landline and long distance now spend an average of $60 per family member for cellphones. These companies have done an amazing job of selling us on the value of the cellphone.

Perhaps the analysts are right and Google, maybe with some help from Apple, will create a new paradigm where the carriers have little choice but to go along and sell bulk minutes. But I just keep thinking back to all of the past arbitrage opportunities where the buyers of the service were also told that the opportunity would be permanent – and none of them were.