The Future of AT&T and Verizon

The cellphone companies have done such a great job of getting everybody to purchase a smartphone that cellular service in the country is quickly turning into a commodity. And, as is typical with most commodity products, that means less brand loyalty from customers and lower market prices for the products.

We’ve recently seen the cellular market demonstrate the turn toward becoming a commodity. In the first quarter of this year the cellular companies had their worse performance since back when they began. Both AT&T and Verizon posted losses for post-paid customers for the quarter. T-Mobile added fewer customers than expected and Sprint continued to lose money.

This is a huge turnaround for an industry where the big two cellular companies were each making over $1 billion per month in profits. The change in the industry comes from two things. First, people are now shopping for lower prices and are ready to change carriers to get lower monthly bills. The trend for lower prices was started by T-Mobile to gain market share, but low prices are also being pushed by cellular resellers – being fed by the big carriers. The cellular industry is only going to get more competitive when the cable companies soon enter the market. That will provide enough big players to make cellular minutes a true commodity. The cable companies have said they will be offering low prices as part of packages aimed at making customers stickier and will put real price pressure on the other cellular providers.

But the downturn in the first quarter was almost entirely due to the rush by all of the carriers to sell ‘unlimited’ data plans – which, as I’ve noted in some earlier blogs, are really not unlimited. But these plans offer lower prices for data and are freeing consumers to be able to use their smartphones without the fear of big overage fees. Again, this move was started by T-Mobile, but it was also driven heavily by public demand. AT&T and Verizon recognized that if they didn’t offer this product set that they were going to start bleeding customers to T-Mobile.

It will be really interesting to watch what happens to AT&T and Verizon, who are now predominantly cellular companies that also happen to own networks. The vast majority of revenues for these companies comes from the cellular parts of their companies. When I looked at both of their annual reports last year I had a hard time finding evidence that these companies were even in the landline network business. Discussions of those business lines are buried deeply within the annual reports.

These companies obviously need to find new forms of revenues to stay strong. AT&T is tackling this for now by going in a big way after the Mexican market. But one only has to look down the road a few years to see that Mexico and any other cellular market will also trend towards commoditization.

Both companies have their eyes on the same potential growth plays:

  • Both are making the moves necessary to tackle the advertising business. They look at the huge revenues being made by Facebook and Google and realize that as ISPs they are sitting on customer data that could make them major players in the targeted marketing space. Ad revenues are the predominant revenue source at Google and if these companies can grab even a small slice of that business they will make a lot of money.
  • Both are also chasing content. AT&T’s bid for the purchase of Time Warner is still waiting for government approval. Verizon has made big moves with the purchases of AOL and Yahoo and is rumored to be looking at other opportunities.
  • Both companies have been telling stockholders that there are huge amounts of money to be made from the IoT. These companies want their cellular networks to be the default networks for collecting data from IoT devices. They certainly ought to win the business for things like smart cars, but there will be a real battle between cellular and WiFi/landline connections for most other IoT usage.
  • Both companies are making a lot of noise about 5G. They are mostly concentrating on high-speed wireless connections using millimeter wave spectrum that they hope will make them competitive with the cable companies in urban areas. But even that runs a risk because if we see true competition in urban areas then prices for urban broadband might also tumble. And that might start the process of making broadband into a commodity. On the cellular side it’s hard to think that 5G cellular won’t quickly become a commodity as well. Whoever introduces faster cellphone data speeds might get a bump upward for a few years, but the rest of the industry will certainly catch up to any technological innovations.

It’s hard to foresee any business line where AT&T and Verizon are going to get the same monopoly power that they held in the cellular space for the past few decades. Everything they might undertake is also going to be available to competitors, meaning they are unlikely to make the same kind of huge margins they have historically made with cellular. No doubt they are both going to be huge companies for many decades to come since they own the cellular networks and spectrum. But I don’t think we can expect them to be the cash cows they have been in the past.

AT&T and Time Warner

ATTI have been thinking about the AT&T and Time Warner merger since it was first announced. Generally the reasons for megamergers are apparent – there is generally some big efficiency or cross benefit to both companies that makes sense. But I had a very hard time seeing very much benefit to either company with this merger.

The obvious intersection between the two companies is programming. Time Warner produces a lot of content – networks including HBO, TNT, TBS, CNN and a host of smaller networks.  And AT&T has a lot of cable customers through DirecTV and U-verse.

But as I think through the programming advantage it’s not as big as you might think. AT&T is not likely to buy any more cable content from Time Warner after a merger than it does today. It’s likely that all of Time Warner’s content is already delivered to AT&T’s video customers. In fact, once the two companies combine, any transactions between the two of them disappear upon consolidation when creating the financial statements for the combined companies.

The non-accountant will say, “Wait, doesn’t that mean that AT&T gets the content for free”? And the answer is no, because it also means that the revenue that AT&T pays to Time Warner today in real cash also disappears. On the consolidated books both sides of the transaction disappear, as if they never happened.

And it’s hard to see any of the typical merger savings from consolidating management. The two businesses have almost nothing in common and it would make no sense for program executives to run a giant ISP or for AT&T executives to make programming decisions.

The only other obvious benefit is for AT&T to somehow leverage the Time Warner content to grow the wireless business. When the merger announcement was first announced the FCC sent a letter to AT&T and told them they would be investigating their zero-ratings practices. Zero-rating is when an ISP provides content to customers without counting the usage against any data caps. AT&T already does this today with a limited amount of content, but if they owned Time Warner they would have far more content they could send over cellphones that wouldn’t count against data caps. An AT&T customer could watch Game of Thrones, for instance, on their AT&T cellular plan without worrying about their monthly data cap. But if they watch non-AT&T video they would be penalized.

With the new administration it looks like zero-rating (and net neutrality in general) is likely dead. But how much of a benefit is zero-rating to a wireless company? Certainly this could drive more advertising revenue to the combined company, but that doesn’t seem like a big enough motivation for the mega-merger. And unless one cellular companies gets killer content that everybody wants to watch on a cellphone, it’s hard to think that zero-rating is going to be a big game changer in terms of shifting wireless customers between providers. I have a hard time seeing AT&T zero-rating as a Verizon Wireless killer.

The only real benefit I can foresee is a bit of a scary one. With each of these mergers between ISPs and programmers the industry collapses to fewer and fewer major players. This merger would put AT&T on the same footing as Comcast in terms of programming content. And maybe that is the major reason for the merger – just keeping up.

But what is to stop the biggest companies from selling content to each other in bulk? I could foresee AT&T and Comcast agreeing to sell content to each other at a reduced price based upon some volume discount. This would end up giving both companies an edge over every other ISP. These two mega-companies (and probably a few others) would then be able to leverage that advantage to crush their other competitors – leaving the nation with even fewer competitors than today.

I don’t know that this scenario could be sustained. It seems like the public is migrating away from a lot of traditional content towards programming produced independently by companies like Netflix. But if the AT&T / Time Warner merger is allowed to happen, what will stop one of these big companies from buying Netflix and every other independent content provider that pops up?

Metropolitan ISPs

Seattle-SkylineI spend most of my time working with rural ISPs. Even my clients that work in larger cities tend to provide service to residential customers and to small and medium businesses. But there is a very competitive market for larger businesses and for businesses that operate in multiple markets.

My clients often run into this when they realize that they are unable to sell broadband to a local chain restaurant, convenience store, bank or other large nationwide or regional business. I recently poked around to see who the carriers are that are selling to metropolitan or nationwide businesses. Some of those on the list will surprise you with their success and there are carriers on the list that you’ve probably not heard of.

Since most of the ISPs in this category don’t report business revenues separate from other revenues it’s difficult to rank these companies by revenue.  Further, some of the companies on this list are almost entirely retail ISPs while others offer wholesale connections to other carriers. Probably the easiest way to compare these carriers is by looking at the number of buildings they claim to have lit with fiber. Of course, even that is not a very reliable way to compare them since there is no standard definition of what constitutes a lit building. But generally these counts are supposed to represent locations with either one very large customer, like a hospital, or else buildings with multiple business tenants. Some of these companies are also count locations like data centers or large metropolitan cell towers.

Here are the carriers that claim to provide fiber to more than 5,000 business buildings:

  • Time Warner 75,000
  • Level3 30,000
  • Cox 28,000
  • AT&T 20,000
  • Zayo 16,700
  • Charter 13,800
  • Fibertech 10,400
  • Verizon 10,000
  • Lightower   8,500
  • Sunesys   7,200
  • Cablevision   7,000
  • Frontier   6,300

Missing from this list is Comcast. I can’t find any references to the number of lit buildings they are in. They are a major provider of business broadband and reported just over 1 million business customers along with $1.3 billion in revenue for their Business Services division. Also missing from the list is CenturyLink who doesn’t seem to claim lit buildings anywhere that I could find. CenturyLink claims to be selling to more than 100,000 businesses on fiber at the end of 2015.

On the list though are both Charter and Time Warner Cable that just merged, which would put them in 88,800 buildings. Fibertech and Lightower merged in 2015 giving them a total of 18,900 lit buildings.

Level3 and Zayo provide both retail and wholesale fiber products, meaning that they will sell connections into the lit buildings directly to businesses or else to other carriers, and they derive a large portion of their revenues from wholesale sales.

The first thing that surprised me about this list is that the cable companies appear to be in a lot more buildings than AT&T and Verizon. There are two possible explanations for this. One is that each group of companies is counting lit buildings in a different way. For example, the cable companies might be counting buildings like schools while the telcos might only be counting larger multi-tenant buildings. But it’s also possible that the telcos have a strategy of only building fiber to the largest buildings in each market while the cable companies will build routinely to smaller buildings. It does raise the question if this is a reasonable side-by-side comparison.

I would also note that some of these companies are growing rapidly and that most of these counts came from 2014 or 2015. Vertical Systems Group (a research and consulting firm that tracks the metro Ethernet market) says that the percentage of the metropolitan businesses connected to fiber grew from 42% in 2014 to 46% in 2015.

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.

 

Programmers Have the Power

huluIt was announced late last month that Time Warner is negotiating to buy a 25% share in Hulu. This would make them equal partners with Comcast, Disney, and Fox in ownership of the OTT service. I think this potential transaction highlights the very complicated dynamics in the industry between programmers and OTT companies.

It’s obvious that the programmers love Netflix, the largest OTT provider, but they also fear them to some extent. On the plus side, from the programmers’ perspective, the four companies (include Time Warner) currently get about $650 million per year just from Netflix to pay for selling rights to various programming, mostly older TV series, to Netflix. This is obviously a significant source of revenue.

But there is also a lot of unease in the industry since OTT providers, and Netflix in particular, are influencing people to demand alternate programming. And while the programmers have lost some money from cord cutters, the real threat to them is skinny bundles. While the revenue the programmers get from Netflix is good money, it is dwarfed by the revenues that come from traditional cable packages. I have never seen that exact number, but by looking at my clients I am going to guess that the average paid by cable companies per customer for programming is probably around $45 per month, not including premium movie channels. That would equate to more than $50 billion per year paid for programming.

The big threat from skinny bundles is that the cable companies will sell small packages of only the most popular programming. The owners of the most popular channels will do okay, but today the real money for a programmer comes from forcing cable companies to carry their entire large suite of channels. If skinny bundles get popular enough they are going to whack the revenue streams from the less popular channels in each programmer’s portfolio. And that means huge potential losses in revenue, far greater than what they will collect from OTT and skinny bundle providers.

There is talk in the industry that the major programmers might start withholding their best content from Netflix. Reed Hamilton from Netflix has voiced this concern many times and this is probably the reason that Netflix is spending so much money to create its own content.

The four programmers could instead funnel all of their own content to Hulu, and in effect pay themselves by hopefully drawing more paying customers to Hulu. The surveys I have seen have shown that a large percentage of viewers are becoming loyal to shows and not to networks, and so giving Hulu exclusive rights to content certainly sounds like a plausible strategy.

The above discussion makes me realize how much power the programmers still have in the industry. While these four programmers couldn’t destroy Netflix, they could probably hobble them. As Bill Gates said, content is king, and that certainly applies in this arm-wrestling match between programmers and service providers. Since there are only a handful of programmers, they collectively have the ability to pick winners and losers in the industry.

Since content is king one has to wonder how long a small group of programmers can keep their current power? Not only is Netflix creating popular content, but there other new content creators like YouTube and Amazon entering the fray and joining companies like HBO and AMC that are becoming mini-powerhouses on their own.

I find it unlikely that the programmers would just cut Netflix or anybody else dead from all of the content, which would seem to be an open invitation to an antitrust investigation. But they can withhold some content, raise the rates on other content and make it harder for companies like Netflix to continue to eat away at their revenue streams.

I have no idea where any of this is going to go. But my guess is that if we could look forward a decade from now that there will be major shifts in the industry. There are going to be some current programmers that wane and other new ones who will enter the market. But as a whole, no matter who the programmers are, they are still going to be in the driver’s seat.

Is Net Neutrality Hurting Telecom Investment?

Network_neutrality_poster_symbolLeading up to the net neutrality decision a lot of the big carriers claimed that putting broadband under Title II regulation would kill their desire to make new investments in broadband. AT&T went so far as to tell the FCC that they would stop all capital investments if net neutrality was ordered. Chairman Tom Wheeler of the FCC quickly called their bluff on this and AT&T backed down.

But net neutrality has been the law now for a while and the large carriers are still crying the same tune. There are regular postings by USTelecom, the trade group for the large carriers, claiming that Title II is hurting investment in the industry.

There is uncertainty in the industry due to the fact that much of the FCC’s ruling is being challenged in the courts. At a recent hearing of the House Communications Subcommittee, Frank Louthan of Raymond James told the committee that the big carriers are making investments in line with what they think will be the final rules after the court fights. I’m sure he’s right because that’s what large companies always do when they face uncertainty – they pick what they think will happen and operate under that assumption. But in this case the uncertainty is ironic since it is being caused directly by the lawsuit brought by the carriers that don’t like the uncertainty.

And it’s hard to see that net neutrality is hurting the biggest carriers. Certainly nobody was affected more by the rule changes than the big cable companies who had essentially no regulation on their broadband before the net neutrality rules. Ars Technical has dug into the most recent financials for these companies and reports that large cable companies have increased capital spending. They report that Comcast’s capital spending this year is up 11% over last year and Time Warner is up 10%. And every large cable company has said they are going to be pouring money into upgrades to DOCSIS 3.1 over the next year, so their capital spending is not going to go down in the foreseeable future.

I always wonder what exactly the carriers don’t like about net neutrality. Net neutrality stopped the carriers from making deals that enriched themselves but that restricted customer choices. But it seems like the public was very much on the FCC’s side on this issue and it’s hard for the carriers to find any sympathy for their cause. Probably more problematic for the carriers is that the FCC, in a surprising part of the net neutrality ruling, put in place rules on the network side of the carriers. They were all getting ready to start charging large content providers like Netflix for bringing content to their networks. The FCC decided that the millions of customers paying for monthly broadband were already paying that cost. What the carriers seem most annoyed about is that customers actually want to use the broadband to which they subscribe. The carriers have plans to put an end to that and everybody is watching Comcast’s new attempt at data caps.

One topic that came up in the House hearings was the fact that much of the net neutrality order was done by forbearance, meaning that the FCC chose which existing rules for telephone service would apply or not apply to regulating data. The carriers fear that a future activist FCC could change their mind at any time on the rules that have been forborne and either change the regulations or else hold change over the carriers’ heads while negotiating other issues. On that topic I agree with the carriers and what the FCC has given they also have the right to take away. The only real fix for this would be a new telecom act from Congress, and with our divided political parties that doesn’t seem very likely.

I remember this same level of teeth gnashing and hair rending by AT&T and Verizon after the Telecommunications Act of 1996. They challenged that ruling and spent the next several years complaining about it loudly. But eventually they were complaining to deaf ears, and in this case one has to think that whatever the courts order is going to stand as the law for a while. But eventually the complaining about the Act died down and both companies have gone on to be far more profitable than they were before the Act. Perhaps they ought to go back and revisit their own recent history and just get on with what they do best—make money.

Shrinking Competition

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

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

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

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

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

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

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

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

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

Cable Banking on WiFI

Wi-FiI’ve been reading a lot lately about the massive effort that cable companies are putting into expanding their WiFi networks. It’s estimated that Comcast and Cablevision together now have almost 9 million public hotspots, most of which come from dual routers in subscribers homes that provide a hotspot link along with the subscriber’s link. There are about another 1.5 million hotspots deployed by Cox, Time Warner and Bright House.

At this point nobody is quite sure how the cable companies are going to monetize this business. Several years ago some standards were developed by the Wi-Fi Alliance to create interoperability between WiFi networks and cellular networks. The idea was to allow cellular companies to offload overflow cellular traffic onto commercial WiFi networks when their cell sites get too busy.

But there are still changes needed in the industry for this to take place. First, a lot more phones need to be enabled to make calls on WiFi, a feature that is now included on the IPhone, but which few people have enabled. Probably the most important thing still lacking is the brains in the networks that will allow easy WiFi roaming so that a call or data transmission can be handed from one WiFi hotspot to another without needing a new verification and login and without restarting a given transmission. Until WiFi roams smoothly you won’t be able to continue a WiFi voice call without being cut off every time you change to a new hotspot. This might not be solved until the whole cellular network moves into the cloud using software defined networking so that the brains that are behind the handoffs of cellular calls can be applied to other types of connections.

But in high traffic areas where there is a lot of foot traffic, WiFi certainly can relieve the data traffic on cellular networks. But are the cellular companies really willing to pay for this? Already today WiFi is carrying a lot of data for cellular-enabled devices for free (to the cellular companies). Adobe published statistics recently that show that 93% of data on tablets and 43% of data on smartphones is carried by WiFi. But one would have to think that the vast majority of this is done in people’s homes and offices where they spend most of their time.

There is no doubt that having somebody else carry their data traffic is a benefit to cellular companies, but that doesn’t mean that they are going to be willing to write checks to WiFi hotspot owners for carrying cellular data. There has been no news of Comcast or the other cable companies making such deals with cellular companies, and so one would think this application is mostly speculation.

One also has to wonder about the efficacy of the current cable hotspots. The majority of Comcast hotspots are going to come from home routers that have been equipped to provide a public WiFi connection as well as the in-home connection for customers. But how useful are these connections? If you’ve ever walked around outside your house looking to connect to your own WiFi network I think you understand that reception outside of your home is sketchy. There are places where the signal is clear, areas where it is poor and areas where it doesn’t exist.

I look at my own house and wonder how valuable it is for Comcast to enable my hotspot. I get joggers and dog walkers by here on the front sidewalk, but otherwise this is not a neighborhood with much foot traffic. The only circumstances where my WiFi might have value is if workmen at my house use it, or if one of my immediate neighbors obtains a Comcast password from somebody and uses my WiFi for free. Otherwise, somebody would need to sit on my front porch or park in my driveway to get WiFi, something I would frown greatly upon.

There are a few ways that Comcast can monetize WiFi. One is to sell roaming WiFi as a service, much like you get in an airport. But to sell that service requires large areas of good coverage. And there are places like that. For example, it’s been reported that Comcast has blanketed the Jersey shore with coverage, and so selling a data connection to non-Comcast customers in these kinds of areas is a possibility.

I think the best business opportunity is for Comcast to get into the cellular business using WiFi enabled phones. They could sell cellular plans that either use only WiFi, or that use WiFi first and use cellular as the back-up. A lot of people mostly use their cellphones in homes and offices and such callers could save a lot of money if Comcast prices it right. Assuming that they could strike a deal with one of the four major spectrum holders they ought to be able to undercut the major carrier’s prices and still be profitable with such products.

But nobody knows for sure why Comcast and the other cable companies are doing this because they haven’t said. They must have something in mind, because they are spending a lot of money on public hotspots. One would certainly hope that Comcast has something in mind since they are antagonizing their cable modem customers yet again by turning them into public hotspots without their permission.

How We Love to Hate the Large ISPs

Poor-customer-satisfaction-272x300I have read a number of articles lately that reminded me of the love / hate relationship that Americans generally have with the large ISPs. Here is a summary of some of these stories.

Americans Pay More for Less Bandwidth. The Open Technology Institute at the New American Foundation recently released its third annual report where it compared US broadband speeds and prices in 24 US cities and in cities around the world. This report shows that speeds have increased in US cities since 2012, but on a cost per megabit delivered most US cities still fall to the bottom of the comparative list. The broadband winner is Seoul where a gigabit of data costs $30 per month followed by Hong Kong and Tokyo at $37 and $39. Contrast this to Verizon FiOS where 500 Mbps costs $300. Very few places in the US outside of Google, some municipalities and some Independent telcos offer an affordable gigabit service.

One of the more interesting comparisons made by the report is comparing the cost for buying 25 Mbps connectivity. The most affordable place for this was London at $24 followed Seoul, Paris, Tokyo, Copenhagen and Prague. The cheapest US City is Kansas City at $41, due to competition with Google. The US cities with Verizon FioS came in around $50. The lowest price in a US City not served by a fiber provider is San Francisco at $58 per month. Most US cities are over well over $60. Not surprisingly, the larger municipal networks like Chattanooga and Lafayette LA are at the head of the US affordability list after Google. The US is also the only country that charges monthly fees for a cable modem and the cable modem customer spends over $100 per year for the cable modem.

The report went on to note that 75% of US customers who can get 25 Mbps service have only one service option. The report concluded that around the world that one thing that holds down landline data prices is significant competition with cellular data. For example, in much of the rest of the world the monthly data caps on cellular phone plans are up to 40 times higher than they are in the US. But our low data caps and the relatively slow speeds of our cellular data networks means that cellular is not a good substitute here for a landline connection.

Customers Continue to Rate Large ISPs Poorly. The results of the annual American Customer Service Satisfaction Survey was recently released and showed that satisfaction with large ISPs is still quite low and is getting worse. This is an annual poll of 70,000 consumers and asks about a wide swath of large businesses. The composite satisfaction with all large ISPs was at 63 on a scale of 100, down from 65 a year ago, and which puts the ISPs at the bottom of the list of all industries. Within those numbers, Verizon FiOS held steady at a rating of 71. Time Warner did the worst dropping from a rating of 63 in 2013 down to 54 this year. Comcast was not far behind dropping from 62 to 57. Century link is the only ISP that improved slightly and went from 64 to 65. Both Cox and Charter dropped 4 points in the last year.

Consumers felt slightly better about their cable TV service and that got a composite rating of 65 compared to the 63 for broadband, But that rating is down from a 68 a year ago.  The ratings were down for every major cable provider compared to 2013. The highest ratings for cable were 69 by DirectTV and AT&T U-verse, while the lowest rating was again Time Warner with a 56.

What is probably the most disheartening about these ratings is that they are dropping year over year. Consumers already rate ISPs and cable companies at the bottom of their satisfaction list across all industries. One would think that would prompt them to improve. And perhaps to some degree they are improving some since speeds are slowly getting faster. But overall satisfaction continues to drop. One might think that price has a lot to do with this, particularly for the cable TV business where there are hefty rate increases each year. But prices have also started to creep up for data and several of the major ISPs are now planning on raising data rates a little each year.

AT&T U-verse Told to Change Advertising. The national Advertising Division (NAD) told AT&T to modify the way they advertise  U-Verse data speeds. AT&T has widely advertised the product as offering up to 45 Mbps and NAB found that in many markets this speeds was either not available or not widely enough available to justify the claim. NAB is a division of the Council of Better Business Bureaus and monitors national advertising claims of all sorts. The NAD recommendations are not mandatory, but since big companies participate in the Better Business Bureau they generally take heed of NAD findings. NAD has made similar findings against CenturyLink in recent years.

I guess it’s really not surprising that customers rate the large ISPs so poorly when you consider some of their practices. Many of them use poorly trained contract installers who don’t put a good face on their company. Many of these companies are notorious for not showing up for scheduled appointments, which is something that a lot of consumers never get over. This year we heard several recordings from Comcast reps who would not let customers drop service. And there is the annual and persistent rate increases.

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%).