Who Wins with Cable Deregulation?

There has been a lot of press lately discussing what might happen if the FCC does away with Title II regulation of broadband. But broadband isn’t the only battle to be fought and we are also in for big changes in the cable industry. Since our new FCC is clearly anti-regulation I think the future of cable TV is largely going to be won by whoever best copes with a deregulated cable world.

Cable companies today are governed by arcane rules that rigidly define how to provide terrestrial cable TV. These rules, for example, define the three tiers of cable service – basic, expanded basic and premium – and it is these rules that have led us to the big channel line-ups that are quickly falling out of favor. Most households watch a dozen or so different channels regularly and even big cable users rarely watch more than 30 channels – but yet we have all been sucked into paying for 150 – 300 channel line-ups.

It’s likely that the existing rules governing cable will either be relaxed or ignored by the FCC. A lot of the cable rules were defined by Congress in bills like the Telecommunications Act of 1996, so only Congress can change those rules. But the FCC can achieve deregulation by inaction. Already today we see some of the big cable providers violating the letter of those rules. For example, Verizon has a ‘skinny’ package that does not fit into the defined FCC definition of the structure of cable tiers. The FCC has turned a blind eye to these kinds of changes, and if they are more overt about this then we can expect cable providers everywhere to start offering line-ups people want to watch – and at more affordable prices if the cable companies can avoid paying for networks they don’t want to carry.

The cable companies are now in a battle with the OTT providers like Netflix, Sling TV and others. It’s clear to the cable companies that if they don’t fight back that they are going to bleed customers faster and faster, similar to what happened to landline voice.

One way cable companies can fight back is to introduce programming packages that are similar to what the OTT providers are offering. This is going to require a change in philosophy at cable companies because the larger companies have taken to nickel and diming customer to death in the last few years. They sell a package at a low advertised price and then load on a $10 settop box fee, a number of other fees that are made to look like taxes, and the actual price ends up $20 higher than advertised. That’s not going to work when competing head-to-head with an OTT competitor that doesn’t add any fees.

The cable companies are also going to have to get nimble. I can currently connect and disconnect from a web service like Sling TV at will. Two or three clicks and I can disconnect. And if I come back they make it easy to reconnect. The cable companies have a long way to go to get to this level of customer ease.

Of course, the big ISPs can fight back in other ways. For example, I’ve seen speculation that they will try to get taxes levied on OTT services to become more price competitive. Certainly the big ISPs have a powerful lobbying influence in Washington and might be able to pull that off.

There is also speculation that the big ISPs might try to charge ‘access fees’ to OTT providers. They might try to charge somebody like Netflix to get to their customers, much in the same manner that the big telcos charge long distance carriers for using their networks. That might not be possible without Congressional action, but in today’s political world something like this is conceivable.

Another tactic the cable companies could take would be to reintroduce low data caps. If the FCC eliminates Title II regulation that is a possibility. The cable companies could make it costly for homes that want to watch a lot of OTT content.

And perhaps the best way for the cable companies to fight back against OTT is to join them. Just last week Comcast announced that it will be introducing its own OTT product. The cable companies already have the programming relationships – this is what made it relatively easy for Dish Network to launch Sling TV.

It’s impossible to predict where this might all go. But it seems likely that we are headed towards a time of more competition – which is good for consumers. But some of these tactics could harm competition and make it hard for OTT providers to be profitable. Whichever way it goes it’s going to be an interesting battle to watch.

Regulation and Capital Spending

At the recent Mobile World Congress, FCC Chairman Ajit Pai said that one of his reasons he wants to reverse Title II regulation is that it has had a drastic impact on capital spending by ISPs. He says that the new regulations have been a disincentive for the ISPs to invest in broadband.

The Chairman bases that position on statistics provided by USTelecom which are based upon work done by Hal Singer, a Senior Fellow at GW Institute for Public Policy. Mr. Singer created the following table that shows the domestic capital spending for the big ISPs for 2014 through 2016. And indeed, this table shows a 5.6% drop, or $3.6 billion a year from 2014 to 2016 – which Mr. Singer attributes to Title II regulation.

2014

2015

2016

AT&T $21.1 $17.3 $17.8
Verizon $17.2 $17.8 $17.1
Comcast $6.4 $7.1 $7.7
Sprint $3.8 $3.9 $1.4
Time Warner Cable $4.1 $4.4 $3.8
T-Mobile $4.3 $4.7 $4.7
CenturyLink $3.0 $2.9 $3.0
Charter $2.2 $1.9 $3.1
Cablevision $0.9 $0.8 $0.6
Frontier $0.6 $0.7 $1.3
US Cellular $0.6 $0.5 $0.5
Suddenlink $0.3 $0.4 $0.3
   Total $64.6 $62.4 $61.0

But like with all statistics, it’s not hard to draw different conclusions from the same set of numbers. For example, all of the drop in capital spending can be attributed to AT&T and Sprint. Taking those companies out of the table shows that capital spending for the other big ISPs is up $2.1 billion or 5% from 2014 to 2016.

So what’s going on with AT&T? There are a number of reasons for their change in capital spending:

·         During these same years the company made massive capital investments in DirecTV ($3 billion over the last few years) and also on the company’s purchase and expansion of its cellular network into Mexico ($3 billion over 4 years). Those numbers are not included in the above table and it’s easy to argue that the company just set different priorities and diverted normal domestic capital to these two giant ventures. If you add those capital expenditures into the table then AT&T’s capital spending has grown – just not their ‘domestic’ spending on traditional broadband.

·         AT&T has been making a huge effort to update its cellular network using software defined networking (SDN) as described at this AT&T website. They have been decommissioning traditional hardware at cell sites and installing much less expensive, off-the-shelf routers that can now control the cell sites from centralized data centers. They have already converted over half of their cell sites and this upgrade means vastly reduced spending on traditional cell site electronics. The company has been bragging about this shift to investors for several years.

·         AT&T has also retracted from expanding traditional big tower cell sites. For a number of years AT&T has been spending money to get fiber to its more remote cell sites, and that upgrade is largely done.

Sprint can also be easily explained. This is a company in trouble and that has been well documented over the last few years. A number of attempts to find a buyer has fallen through. What’s not shown on this table is that in 2013 (the year before the table begins) Sprint spent $6.4 billion on capital in a massive system-wide upgrade to LTE. Since then the company has very publicly stated that they are cutting capital spending to conserve cash. The company is only expanding now with carefully selected small cell deployments. But the company is clearly in network maintenance mode and is spending only what is needed to keep the cell sites functioning. Also included in the drop in spending is a change in the way that Sprint treats leased cellphones – they used to capitalize the phones and they now expense them.

There are going to be further decreases in future telecom capital spending across the industry. I expect capital spending for all four big wireless companies to keep decreasing due to efficiencies from SDN. We are now seeing a burst of spending from cable companies due to upgrades to DOCSIS 3.1, but when that’s done I would expect a significant decline in their capital spending as well. We are entering a time when improvements in software will lower the need for new hardware – not just in telecom, but in many other sectors as well.

I have always been annoyed when statistics are used to falsely justify public policy. There is no evidence that the big ISPS have changed their spending habits in any drastic way due to Title II regulations. The argument that Title II has affected capital spending comes directly from constant press releases from USTelecom, and the FCC Chairman should be above repeating arguments from lobbyists. If the FCC wants to undo Title II then it should just do it – there are a number of valid reasons why this might be good policy. But it’s disingenuous to cook up false reasons for why the change is needed.

What the New Administration Means for Small ISPs

white-houseI’ve seen a dozen articles in the last week speculating what the change in administration means to the telecom industry. The articles range from predictions of doom and gloom (mostly from a consumer perspective) to near glee (from the giant telcos). But my audience and clients are primarily small telcos, ISPs, cable companies and municipalities, so I’ve been thinking about what this change means for small carriers.

There has been a lot of speculation about a big spending program to build infrastructure. But nobody has any idea if this might include money for broadband infrastructure. And even if it does, might that money go to a wide number of broadband providers or just to the big companies like the CAF II funds? So until we find out more details, any talk about infrastructure is pure speculation. I’m sure details will start solidifying in the first quarter after the new administration is in place.

One thing that every prediction I have seen agrees on is that we are going to see reduced regulation. This might come about due to having a republican majority at the FCC. Every major decision during the Wheeler regime has been passed with a 3-2 democratic vote. So it would be easy to see a new FCC reverse everything that Wheeler got passed. There is also speculation that Congress might pass a new Telecom Act which would direct the FCCC to cut regulations.

So what does less regulation mean for smaller ISPs? When looking at every regulation that has passed over the last decade I come to the conclusion that, from a regulatory perspective, this will have very little effect on smaller service providers. Almost everything that has been passed has been aimed at curbing the practices of the giant telcos and cable companies.

Smaller carriers would see some benefit due to reduced paperwork. For instance, competitive voice providers have had to provide an option to customers for battery backup. That sort of requirement might disappear. There was undoubtably going to be some new paperwork involved with the new privacy rules that will likely be canceled. My clients all find some of the federal paperwork to be annoying and unneeded and perhaps some of that will go away.

But the big changes over the last decade didn’t really impact small companies at all. I have to laugh to think of one of my clients somehow creating a product package that violates net neutrality. It’s silly to think that small ISPs might might somehow profit from using their customers’ data. If those big initiatives get reversed it will mean almost nothing to small companies since none were engaging in the activities that these new regulations are trying to fix.

There is one downside for small ISPs to reduced regulation. A lot of small carriers compete against the giant telcos and cable companies. Anything that takes away restrictions on the giant companies probably gives them even more of a competitive edge than they have today. So I guess my biggest concern is what an unfettered Comcast or AT&T will be able to do to crush smaller competition.

There are aspects of Title II regulation that help the small carriers compete against the big ones. My favorite, which is due to be implemented soon, is the requirement that ISPs tell their customers the truth about their broadband products. This will be done in the format similar to the label on foods where the ISPs have to disclose actual speeds, latency, prices, etc. about their products. I think that will give small carriers a way to show that they are better than the big companies. If Title II regulation goes away then the good parts go away along with the bad parts.

I’ve always thought that net neutrality was focused on reining in the big companies from developing products that nobody else can compete with. The big carriers have wanted to make exclusive deals with content providers and social media networks that would give them a leg up over anybody they compete against.

So my message to small ISPs is not to worry too much. If the FCC reverses everything done in the last ten years you are not going to see much practical change in your regulatory processes or costs. The only real worry is what an unregulated Comcast or AT&T might look like. And who knows? Maybe you’ll get some federal dollars to expand your broadband network – we’ll just to wait and see about that one.

Forced Arbitration

Scale_of_justice_2_newYou may have noticed that the majority of consumer contracts and consumer terms of service documents now require arbitration to resolve disputes. These are in almost every contract or terms of service you sign like when you take out a credit card, buy a new washer or open a new bank account. Arbitration is now included in most telco and ISP terms of service that customers must sign before buying a new service.

Arbitration is a process that has been used in the business world and in the telecom world for many years. With arbitration two parties in a contract submit their dispute to one or more impartial persons for a final and binding decision, known as an award. These awards are made in writing and are generally final and binding on the parties in the case. Most contracts between carriers use arbitration because it’s a faster and less costly way for two carriers to resolve a dispute. Arbitration works well between companies that voluntarily agree to abide by a decision made by an arbitrator. Disputes are resolved more quickly than with a normal law suit and since it’s binding the two sides can move forward without having to worry about appeals.

But forcing arbitration on consumers when they buy products or services is a very different situation because the two parties are not equal. Consumers are forced to agree to binding arbitration by checking a box on a computer screen or in signing a receipt to accept a product. This is a very different relationship than one between two commercial companies since the consumer has limited rights to start with and the agreements people must sign constrict their rights even more.

Commissioner Mignon Clyburn has taken the position that forced arbitration is bad for consumers. There is also a movement in Congress with a bill proposed by Patrick Leahy and Al Franken to end the practice. They all argue that the arbitration process is heavily biased in favor of the big companies, like ISPs, that force arbitration.

And they are right. An individual consumer of broadband or cable service isn’t going to invoke a very costly arbitration process to resolve a billing dispute. It’s hard to imagine that would ever happen. And so the practical impact of forced arbitration is that big companies can overbill or abuse customers with no fear of having to make things right.

In the telephone world consumers used to be protected by tariffs that were on file with regulators. Those tariffs contained a lot of rules about how customer complaints would be resolved. For the most part the rules were not too heavily biased in either direction, and so the mere presence of the rules generally meant that a customer could reach an agreement with a telco over a dispute without having to go to a higher level. But if necessary the customer could complain to the state regulatory Commission. Most states had a few hundred such complaints per year and these generally led to a forced conversation between the telco and the customer to reach a resolution.

But tariffs are largely gone. Some, but not all, cable franchises have created rules to provide some consumer protection. And there is nothing like a tariff for broadband products.

The main reason large ISPs are using forced arbitration is not so that they don’t have to adjust customers’ bills. The arbitration provision makes it much harder to bring a class action lawsuit against a carrier for harming many customers. You can like or hate class action lawsuits. There certainly have been abuses in this area with unscrupulous lawyers filing such suits in the hope of reaching a settlement. But there are also many cases where these suits were the only way to get large companies to stop deceptive billing practices or other ways of ripping off customers.

What I find most interesting about Commissioner Clyburn’s position is that perhaps the FCC is now in the process of doing something about forced arbitration for telco products. There are other government agencies ranging from the Department of Education, the Department of Defense, and the Consumer Financial Protection Bureau that are trying to crack down on the practice.

It’s possible that Title II regulation gives the FCC the authority to address the issue. I’m no lawyer and I have no idea if Title II regulation gives the FCC that power. But in the past, the protections built into tariffs largely flowed downhill to the states due to the FCC’s position on customer rights, and that authority stemmed from Title II regulation of telephone service.

I think small ISPs ought to look to see if your customer terms of service contain forced arbitration. I would bet that many do, because it’s common for small companies to copy the terms of service from some larger company. If you have such a clause you ought to consider the message it gives to your customers. It says that they are basically powerless to sue you over a dispute. That may sound like a good thing, but then also ask how many times customers have actually sued you over one of your consumer products. Chances are that it’s zero. The fact is that small companies find ways to resolve issues with customers while big companies do not. Removing forced arbitration from customer contracts is more customer friendly and that is probably in your best interest. Also, if the FCC makes this mandatory you want to be able to say to your customers that you were ahead of the curve and do not require forced arbitration.

Investing in Fiber

fios vanThere is a recent short article in Forbes titled, To Evade the Wheeler Tax, Capital is Fleeing Digital Infrastructure by Hal Singer. The premise of the article is that the FCC’s move to regulate broadband under Title II has somehow driven the large ISPs to stop investing in broadband. He cites the fact that Verizon has used their excess cash to buy content and software rather than invest it in infrastructure. Just in the last year Verizon has bought AOL for $4.4 billion, Fleetmatics (connector of smart devices) for $2.4 billion and recently announced the purchase of Yahoo for $4.8 billion.

But Singer couldn’t be more wrong. It’s obvious that Singer has a bias against broadband regulation by the title of his article, and certainly Forbes is in generally favor of the unregulated marketplace. But for his premise to be true, Verizon would have to be stopping its expenditures for broadband and instead be choosing these new paths. And that has not happened.

Verizon stopped building FiOS fiber well over a decade ago. It’s been clear for a long time now that Verizon doesn’t think their future is in landlines. For a very long time they have considered themselves as a wireless company. One only has to look at their annual report to understand that somebody who didn’t know the company might barely realize they are in the wireline business. Those reports talk almost entirely about cellular, which makes sense since the wireless business dwarfs the broadband business.

Singer is right that Verizon has been ditching landline properties. But these were mostly in areas away from Verizon’s northeast core and included both copper and fiber assets. But it’s also clear that Verizon hasn’t given up broadband in the northeast. They are currently in the process of buying XO for $1.5 billion, one of the larger fiber-based CLECs that’s centered in the northeast. Verizon also recently announced they were going to bring broadband to Boston, and it now looks like this will become a test bed for using millimeter wave radios as a fiber-to-the curb deployment, rather than building traditional FiOS networks. My guess is that Verizon sees wireless local loops for broadband as their next big use of their cellular spectrum and existing fiber assets, and if Boston proves the new technology then Verizon will probably begin making huge investments again in broadband.

The problem with articles like Singer’s is that rich people that make big investments read Forbes and might decide that investing in broadband is a bad idea. Before they do that I hope that they look at broadband investments with the right perspective. Investing in broadband is an investment in infrastructure. And that means that such the investment is going to earn infrastructure-like returns. Anybody that builds broadband networks is likely looking at long-term returns of 10% to 20%. The returns can be a little higher for cherry-picking only the best neighborhoods. And the returns will probably be higher if wireless local loops can save on capital expenditures.

But infrastructure returns are not venture capital returns. Investments today in software and content are seeking returns of at least 30%. But such investments are a lot riskier than investing in broadband – and thus the relative returns.

The fact is that for the last ten years almost nobody has invested in broadband in this country. Most of the new construction since Verizon stopped building FiOS has come from independent telephone companies, municipalities and cooperatives. Today we are seeing more activity with the two biggest players being Google and CenturyLink, along with a dozen or so smaller urban fiber builders. We also now see the cable companies making significant investments to move cable modems to the next generation DOCSIS 3.1.

So the decision by the FCC to regulate ISPs under Title II has changed almost nothing because big telcos like Verizon were not investing in landline broadband before that decision. Certainly that decision might eventually put a cap  on the returns of the largest ISPs like Comcast and Verizon. But mostly the FCC rules are going to stop the large ISPs from ripping off the public with data caps or by raising the rates through the backdoor by inventing imaginary fees. But the FCC rules are not going to change the fundamentals of the marketplace that understands that investment in broadband is infrastructure investing. Companies that make such investments will still make infrastructure-like returns, like has been true during all of my career. The much more fundamental question that Singer ignores is, why aren’t there more companies looking to make 10% to 20% infrastructure returns? Answering that question might require a book rather than a blog or a short article.

Can Big ISPs Resist Data Caps?

MagneticMapI think we can expect data caps to continue to be in the news. Comcast was getting a lot of negative press on data caps at the beginning of the year and had generated tens of thousands of complaints at the FCC from their 300 GB (gigabit) monthly data cap. They relieved that pressure by unilaterally raising all of the data caps to 1 TB (terabit) per month. But Comcast has now been quietly implementing the terabit cap across the country and recently activated it in the Chicago region.

In May of this year, AT&T U-verse revised a few of their data caps upward, but at the same time began seriously enforcing them for the first time. Until recently, most AT&T data customers that exceeded the caps paid no extra fees. The AT&T U-verse data caps are much smaller than the new Comcast cap. For traditional single-copper DSL customers the data caps is 150 GB per month. For U-verse speeds up to 6 Mbps the cap is now 300 GB per month. For speeds between 12 Mbps and 75 Mbps the cap is 600 GB, while customers with speeds at 100 Mbps or faster now have the same 1 TB monthly cap as Comcast. AT&T has a kicker, though, and any customer can buy unlimited usage for an additional $30 per month.

The large ISPs, in general, are under a lot of pressure to maintain earnings. They have all profited greatly by almost two decades of continuous rapid growth in broadband customers. But that growth is largely coming to an end. A few of the cable companies are still seeing significant broadband growth, but this is coming mostly from capturing the remaining customers from big telco DSL.

At the beginning of this year, the Leichtman Research Group reported that 81% of all American homes now have a broadband connection. When you add up rural homes that can’t get broadband and those elsewhere that can’t afford full-price broadband, there are not room for much more growth. Even if a lot of low-income households get broadband through the Lifeline Fund subsidies, those customers will be at low rates and won’t do a lot to the bottom line at the big ISPs.

Meanwhile, the large ISPs are seeing an erosion of cable revenues. While cord cutting is small, it is real and the cable industry as a whole is now slowly losing customers. Probably more significant to their profits is cord-shaving; customers cut back on the cable packages to save money (and because they have alternatives to the big cable packages). Even if cable wasn’t starting to bleed customers, the margins continue to shrink due to the huge increases in programming costs. Even high margin revenue streams like settop boxes are under fire at the FCC.

When I look out five years from now it’s obvious that the ISPs will somehow have to milk more profit out of broadband. There are only two ways to do that – increase rates or find backdoor ways like data caps to get more money from broadband customers.

It’s not hard to understand why the large ISPs fought net neutrality so hard. By putting broadband under Title II regulation the ruling has already started to impact their bottom line. I think Comcast raised their data cap to stop the FCC from investigating data caps. The proposed FCC rules on privacy will largely strip the ISPs of the ever-growing revenues from advertising and big data sales. And it’s certainly possible in the future that the FCC could use the Title II rules to hold down residential data rates if they climb too high.

It’s got to be a bit hard to be a big ISP right now. They look at envy at the big revenues that others are making. The cellular companies are making a killing with their stingy data caps. Companies like Google and Facebook are making huge amounts of money by using customer data for personalized advertising. Meanwhile, the ISPs live in a world where, if they aren’t careful, they will eventually become nothing more than the big dumb pipe provider – the one future they fear the most.

Comcast, and perhaps the new Charter, are large enough to find other sources of revenue. Comcast is now pursuing a cellular product and has done fairly well selling security and smart home products. Comcast also makes a lot of money as a content provider, boosted now by buying DreamWorks. But any ISP smaller than these two companies is going to have a nearly impossible time if they want to continue to match the growth in bottom line they have enjoyed for the last decade.

What’s Next After the Net Neutrality Ruling?

Network_neutrality_poster_symbolNow that the US District Court has affirmed the net neutrality ruling in its entirety it’s worth considering where the FCC will go next. Up until now it’s been clear that they have been somewhat tentative about strongly enforcing net neutrality issues since they didn’t want to have to reverse a year of regulatory work with a negative court opinion. But there are a number of issues that the FCC is now likely to tackle.

Zero-Rating. I would think that zero-rating must be high on their list. This is the practice of offering content that doesn’t count against monthly data caps. This probably most affects the customers in the cellular world where both AT&T and T-Mobile have their own video offerings that don’t count against data caps. With the tiny data caps on wireless broadband there is no doubt that it is a major incentive for customers to watch that free content, and consequently drive ad revenues to their own carrier.

But zero-rating exists in the landline world as well. Comcast has been offering some of its content on the web to its own customers. They claim this is not zero-rating, but from a technical perspective it is. However, now that Comcast has raised the monthly data cap to 1 terabit then this might not be of much concern to the FCC right now.

Privacy. The FCC has already proposed controversial rules that apply to the ISPs and consumer privacy. In those rules the FCC proposes to give customers the option to opt-out of getting advertisement from ISPs, but more importantly consumers can opt-out of being tracked. This would put the ISPs at a distinct disadvantage compared to edge providers like Facebook or Google who are still free to track online usage.

Last year the FCC also started to look at the ‘super-cookies’ that Verizon was using to track customers across the web. This privacy ruling (which is now on a lot more secure footing based upon the net neutrality order) could end the supercookies and many other ways that ISPs might track customer web behavior. Interestingly, both Verizon and AT&T have been bidding on buying Yahoo and this potential privacy ruling puts a big question mark on how valuable that acquisition might be if customers can all opt out from being tracked. I think Verizon and AT&T (and Comcast) all are eyeing the gigantic ad revenues being gained by web companies and this ruling is going to make it a challenge for them to make big headway in that arena.

Lifeline. I think that the net neutrality ruling also makes it easier for the FCC to defend their new plans to provide a subsidy to low-income data customers in the same manner they have always done for voice customers. Now that data is also regulated under Title II it fits right in to the existing Lifeline framework.

Data Caps. At some point I expect the FCC to tackle data caps. It’s been made clear by many in the industry that there are no network reasons for these caps, even in the cellular world. The cellular data plans in most of the rest of the world are either unlimited or have extremely high data caps.

The FCC said in establishing net neutrality that they would not regulate broadband rates. And in the strictest sense if they tackle data caps they would not be. The regulatory rate process is one where carriers must justify that rates aren’t too high or too low and has always been used, as much as anything, to avoid obvious subsidies.

But data caps – while they can drive a lot of revenues for ISPs – are not strictly a rate issue, and in facts, the ISPs hop through a lot of verbal hoops to say that data caps are not about driving revenues. And so I think the FCC can regulate data caps as an unnecessary network practice. It’s been said recently that AT&T is again selectively enforcing its 150 monthly gigabit cap, and so expect the public outcry to soon reach the FCC again, like happened last year with Comcast.

The Real Impact of Network Neutrality

Network_neutrality_poster_symbolThe federal appeals court for Washington DC just upheld the FCC’s net neutrality order in its entirety. There was a lot of speculation that the court might pick and choose among the order’s many different sections or that they might like the order but dislike some of the procedural aspects of reaching the order. And while there was one dissenting option, the court accepted the whole FCC order, without change.

There will be a lot of articles telling you in detail what the court said. But I thought this might be a good time to pause and look to see what net neutrality has meant so far and how it has impacted customers and ISPs.

ISP Investments. Probably the biggest threat we heard from the ISPs is that the net neutrality order would squelch investment in broadband. But it’s hard to see that it’s done so. It’s been clear for years that AT&T and Verizon are looking for ways to walk away from the more costly parts of their copper networks. But Verizon is now building FiOS in Boston after many years of no new fiber construction. And while few believe that AT&T is spending as much money on fiber as they are claiming, they are telling the world that they will be building a lot more fiber. And other large ISPs like CenturyLink are building new fiber at a breakneck pace.

We also see all of the big cable companies talking about their upgrades to DOCSIS 3.1. Earlier this year the CEO of Comcast was asked at the INTX show in Boston where the company had curtailed capital spending and he couldn’t cite an example. Finally, I see small telcos and coops building as much fiber as they can get funded all over the country. So it doesn’t seem like net neutrality has had any negative impact on fiber investments.

Privacy. The FCC has started to pull the ISPs under the same privacy rules for broadband that have been in place for telephone for years. The ISPs obviously don’t like this, but consumers seem to be largely in favor of requiring an ISP to ask for permission before marketing to you or selling your information to others.

The FCC is also now looking at restricting the ways that ISPs can use the data gathered from customers from web activity for marketing purposes.

Data Caps. The FCC has not explicitly made any rulings against data caps, but they’ve made it clear that they don’t like them. This threat (along with a flood of consumer complaints at the FCC) seems to have been enough to get Comcast to raise its data caps from 300 GB per month to 1 TB. It appears that AT&T is now enforcing its data caps and we’ll have to see if the FCC is going to use Title II authority to control the practice. It will be really interesting if the FCC tackles wireless data caps. It has to an embarrassment for them that the wireless carriers have been able to sell some of the most expensive broadband in the world under their watch.

Content Bundling and Restrictions. Just as the net neutrality rules were passed there were all sorts of rumors of ISPs making deals with companies like Facebook to bundle their content with broadband in ways that would have given those companies priority access to customers. That practice quickly disappeared from the landline broadband business, but there are still several cases of providers using zero-rating to give their own content priority over other content. My guess is that this court ruling is going to give the FCC the justification to go after such practices.

It’s almost certain that the big ISPs will appeal this ruling to the Supreme Court. But an appeal of a positive appeal ruling is a hard thing to win and the Supreme Court would have to decide that the appeals court of Washington DC made a major error in its findings before they would even accept the case, let alone overturn the ruling. I think the court victory gives the FCC the go-ahead to fully implement the net neutrality order.

 

Regulating Broadband Rates

FCC_New_LogoFCC Chairman Wheeler testified in front of the House Communications Subcommittee recently about the FCC’s authority to set broadband rates. He was testifying about a bill passed out of subcommittee a few weeks ago, introduced by Rep. Adam Kinzinger (R-Ill.) that would prohibit the FCC from regulating broadband rates.

Wheeler cautioned that he was concerned that any law that curtailed the FCC’s right to regulate rates might also inhibit the FCC’s ability to regulate the three basic tenets of network neutrality – preventing blocking, throttling, or paid prioritization of data.

Unless you are an FCC rule junkie it’s probably hard to understand why rates and net neutrality might be tied together. But the Chairman’s concern comes from the reliance of the FCC on using Title II as the basis for regulating net neutrality. Part and parcel with the Title II rules also comes the ability to regulate rates.

Back when the Chairman was talking about using Title II rules he said publicly that the FCC wasn’t intending to get into the rate regulation business for broadband. In these hearings the Chairman repeated this and said that the FCC would be glad to help craft language that limit the FCC’s ability to do traditional rate regulation while making sure not to undo the other aspects of Title II regulations.

As a consumer and one who tracks industry trends I’m not so sure that the FCC should be so quick to give up rate regulation of broadband. I believe that we are at the beginning of the time when we will see continuous annual price increases for broadband. The large cable companies and telcos are under huge pressure from Wall Street to increase earnings every quarter and a lot of their traditional revenue streams like cable TV and telephone service are in a decline. This is going to leave no alternative to the big ISPs but to raise broadband rates.

We’ve already seen the beginning of this. The recent Comcast data caps trials and the recent announcement from AT&T that customers could buy unlimited data for only $30 more than what they are already paying for broadband are both nothing more than big rate increases on the biggest data users of broadband. All of these companies understand how fast consumer use of broadband is growing. We have been a curve since the 1980s where home use of broadband has doubled about every three years and there is no sign of a slowdown. So the big ISPs set data caps knowing that they will get extra revenue today from perhaps 10% to 20% of their customers, but also knowing that each year it’s going to affect more and more people.

And rate caps are only the first place ISPs will raise rates. We’ve seen a number of the large ISPs raise rates a few bucks in the last few years, and as earnings pressure increases one can expect that we are not many years away from a time when data rates are going to be increased each year in the same manner that cable rates have increased. But there is a huge difference. Cable rate increases have been driven in large part by increases in programming costs (although cable companies usually tacked on a little extra to boost bottom line). But it’s already clear today that broadband has a huge margin and that, if anything, the cost of underlying Internet connectivity keeps dropping each year. If ISPs raise data rates it’s due to nothing more than wanting to make more money.

And there is fundamentally nothing wrong with any business wanting to make more money. Except that for most markets in the US there is only one dominant broadband provider in the form of a cable company. And even where there is a second provider, like Verizon FiOS, they will undoubtedly be raising rates in lockstep with the cable companies in a pure demonstration of duopoly competition.

So I hope that the FCC doesn’t give up rate setting abilities because the day is coming within a decade when it’s going to be badly needed. You can be sure that the ISPs understand this completely and that they are the authors of the bill that would stop the FCC from looking at rates. They know that the FCC isn’t likely to do this today, but they know that there is going to be a huge public outcry for the FCC to do this in the future and they are launching a preemptive strike now to win this battle before it starts.

Why Regulate Broadband?

FCC_New_LogoOften lost in the discussion of how much the big ISPs in the country hate Title II regulation of broadband is the more general discussion of whether the broadband market ought to be regulated. When I first entered the industry telephone service was heavily regulated in almost every manner imaginable, and this was due to the gigantic monopoly power of AT&T at the time. Over the years various parts of the telephone industry have become lesser regulated or even deregulated. And somehow during this process we seem to have gotten used to the idea that communications services are best when deregulated.

But I want to step back to a general discussion about regulation in general. Governments tend to regulate industries for several different reasons. For example, there is generally regulation of the financial industry because failures of large banks can devastate the rest of the economy. We also regulate businesses that can harm people, and so we do things like inspect food or have rules about transporting dangerous chemicals.

And finally, we regulate companies that provide services that most people need and for which a given provider can hold huge power over customers by nature of being a monopoly. This is why we regulate electric and water companies – because they tend to be natural monopolies in a given market. And it’s why we used to regulate Ma Bell.

When broadband first became a product there was no discussion of regulating it because it didn’t appear at the time that there were going to be monopoly providers. In the dial-up days there were all sorts of new companies like AOL and Compuserve entering the market. And then along came faster broadband and the cable companies and the telcos launched new and faster broadband products at almost the same time. It looked like there would be vigorous competition between DSL and cable modems.

But in the few decades since then it’s become obvious that cable modems have won that battle. Cable companies are growing to the point in many markets of having a virtual monopoly since the DSL products are too slow to keep pace. Every quarter when broadband customers are announced by all of the big companies it’s obvious that there are still people flocking from DSL to cable modems. It’s been clear for some time that broadband, which has largely been a duopoly market, is trending towards monopoly as DSL fades.

The other test that regulators use when considering regulation is if there is any effective substitute for the monopoly products or services. Cable companies argue that cellular wireless data and fiber are both effective substitutes for cable modem. But are they really?

I’ve written a number of times about how lousy cellular wireless is as a competitor to landline broadband. While there are certainly people who are satisfied with only a cellular data connection, the bandwidth and pricing of cellular data make it a poor second cousin to landline data, and most cellphone users seek out WiFi rather than rely solely on cellular data. And while there is talk about going to 5G and gigabit wireless networks, this talk is still almost all hype.

There are certainly markets where fiber is a good competitor for cable modems. But the other day I looked at the list of the 200 largest cities in the country and the majority of cities on that list do not have fiber and are not on anybody’s list to bring fiber. And even where there is some fiber there are no large markets where there is fiber everywhere in a city – ask all of the eastern cities how they feel about how Verizon built FiOS to only parts of their cities. Further, the cable companies are all implementing DOCSIS 3.1 which is going to give cable systems the ability to keep up with fiber speeds for the next decade.

And even where somebody builds fiber, at best we end up in a duopoly situation. When you look at where Google has brought fiber it looks to me like most of the competition is with data speeds and not with prices. If anything, the average price paid for broadband is higher where Google has built fiber.

It’s obvious that Comcast doesn’t think there is any effective competition as witnessed by their trial with data caps, which everybody expects to go nationwide soon. Their data caps are going to mean a big rate increase for a lot of customers, something that could never happen in a competitive market.

So, when looked at from a regulatory perspective, the broadband market is ripe for regulation. In fact, it probably should have been regulated much sooner. I see nothing on the horizon that is going to improve broadband choice for the vast majority of Americans and I hope the FCC can find a way to put some teeth in the way they regulate broadband.