FirstNet – A Boon or Boondoggle?

The federal program FirstNet was born out of the tragedy of the 9/11 terrorist attacks. At the time there was a lot of negative press when it was realized that first responders from New Jersey were unable to communicate with those from New York. And the idea was born to create a nationwide platform so that all first responders could easily communicate with each other.

The FirstNet concept first tackled the concept of interoperability. There were a number of jurisdictions where interoperability was an issue then. But since 9/11 most metropolitan areas have solved the interoperability issue on their own. The fire and police departments in regions got together in the years after 9/11 and made sure they could communicate with each other. One of the easiest fixes was for first responders to add cellphones to complement the first responder radios that were the major method of communications in 2001. So the concept morphed into a discussion of finding cellular bandwidth for first responders. We’ve seen repeatedly that local cellular networks instantly get clogged during any kind of major emergency, and this means that first responders have trouble making cellphone connections just like everybody else.

Congress stepped into the discussion in 2012 and created FirstNet (First Responder Network Authority). As part of that action Congress set aside Band 14 of the 700 MHz spectrum for the exclusive use of first responders nationwide. After several reboots of the RFP process the new agency finally chose AT&T to provide a nationwide LTE network for first responders. The company was given $7 billion as the first payment towards creating the nationwide cellular network. The GAO had estimated that the final network could cost as much as $47 billion.

States were given the right to opt-in to FirstNet with zero cost to the states. In the last month or so thirteen states have chosen to be part of the effort. That means that AT&T will provide the network in those states using federal dollars.

But there is a huge question, mostly technical, of whether this network makes any sense. A lot of engineers say that FirstNet is overkill and that there are now other ways to solve the same problem. A hint of how easily this can be done came from a press release from Kansas, which just bought into FirstNet. In that release AT&T said that until FirstNet is built in the state that first responders would immediately get priority access to cell towers and by the end of this year would have preemptive access – meaning that a call attempt made by a first responder would shove somebody else off the cellular network. Providing preemptive access is a far less costly way of solving the problem. If first responders can be given preemptive access that easily, then there really is no longer a need for FirstNet.

To add fuel to the fire, Verizon just announced at the end of the next week that they would offer these same services to first responders everywhere – and with zero federal dollars. Verizon will immediately offer preemptive access to cell towers to all first responders.

Any topic having to do with first responders is always an emotional one and much of the first responder community has bought into the concept of having interference-free spectrum. But the Verizon announcement shows that the FirstNet solution is obsolete before the first piece of network is constructed.

And the FirstNet implementation comes with a big national cost. It’s clear that we need a huge amount of bandwidth to satisfy customer demands for cellular data. It seems wasteful to use a slice of prime spectrum in Band 14 of 700 MHz when it’s not needed. That spectrum is worth more to the country for providing cellular data than for handling calls from first responders. This would not be true if first responders really needed this spectrum to communicate – but the cellular companies can give them preemptive access using existing cellular spectrum. For the vast majority of time the FirstNet spectrum will sit virtually unused – at any given time in a city it might be handling hundreds of transmissions from first responders when it could instead be handling hundreds of thousands of transmissions for everybody.

There is also the rural issue to deal with. FirstNet is supposed to provide nationwide first responder access. But as somebody who travels widely in rural America, I can tell you that a lot of the AT&T LTE coverage map is bosh. There is a whole lot of rural America where cell coverage is either spotty or non-existent. When you get to a rural place you quickly come to understand the short distance that a cell signal travels from any given cellular tower. There are gaps everywhere in rural America between widely-spaced cell towers.

First responders in rural America are not going to rely on the FirstNet spectrum even if it’s freely available to them. They are more likely going to keep their current radio networks that work today, using spectrum that travels farther than the 700 MHz spectrum. I can’t help but picture a rural tragedy, such as a downed-plane, where first responders from outside the area will have no communication ability if the FirstNet signal to the needed area is weak or nonexistent.

I see this as another giant government handout to the huge carriers. You can be assured that a lot of the money going to AT&T will go to their bottom line. I hope, at least, that some of the money they are getting for FirstNet will at least improve normal cellular coverage in rural America – but I’m not holding my breath. To me this seems like another big federal program that is being spent to fix a problem that no longer exists. Local jurisdictions solved the interoperability problem in the first few years after 9/11. And the ability of cellular companies to give preemptive access to first responders means there is no reason to set aside a huge valuable slice of spectrum.

Consolidation of Fiber Networks

I’ve written a few recent blogs discussing the amount of fiber that’s going to be needed to support the 5G networks envisioned by Verizon and AT&T. This blog in particular cited a recent Deloitte study that estimates that the cost to build the fiber needed to support a ubiquitous 5G network nationwide would be $130 billion.

We know that adding fiber is now a high priority for Verizon. They announced in April a deal to buy over $1 billion of fiber from Corning over 3 years. (As an aside, all of the press releases and articles about that purchase say that amount buys 12.4 million miles of fiber per year, or 37.2 million miles of fiber. There are only a little over 4 million miles of roads in the US, so that obviously means miles of individual fiber strands. Pardon the interruption, but misleading statistics drive me up the wall.)

We can almost be certain that Verizon plans to build fiber for backhaul to cell sites. There are around 250,000 current cell towers in the country, but the deployment of small neighborhood cell sites is going to explode that number potentially by millions. Years ago both Verizon and AT&T elected to let other companies build and own cell towers, which spun off a major new industry. And in that process both companies largely agreed to lease fiber transport to reach those towers. But as the cell industry margins are tightening the companies are now looking to directly own as many of those fiber routes as possible to hold down lease expenses.

While Verizon plans to build a lot of fiber, they are also on an obvious path to buy existing fiber networks that supply transport to cell towers. Last year they purchased XO Communications and just last week announced they were buying a Chicago-area fiber network from Wide Open West.

I have seen several analysts speculate that Verizon will be considering more fiber purchases. Interestingly the analysts focus on the potential purchase of large ILECs like Consolidated or Cincinnati Bell, which both own a lot of fiber. But much of the fiber in these companies is last-mile fiber to reach customers, and it would be curious to see Verizon buy back into that business. Just last year they sold off a significant chunk of their FiOS fiber network to Frontier and it would be a major reversal of that strategy to turn around and invest this soon in last mile fiber. We’ve seen big companies pivot before, but this would be possibly the biggest such change of mind our industry would ever have seen.

I think it’s more likely that they will consider buying transport fiber networks rather than last-mile networks. The problem the company faces is that there are not that many big fiber providers left. CenturyLink recently purchased the largest such network from Level 3, which owns over 55,000 miles of fiber. The only other fiber transport networks left that own over 10,000 miles of fiber are Birch, Zayo, EarthLink, Cogent and Lightower/Fibertech. There are only another half dozen companies that own fiber transport networks of between 5,000 and 10,000 miles. I have to think that Verizon and AT&T have considered buying many of these companies over the last year or two.

There is one other set of big fiber networks that don’t get as much national attention. These are fiber transport networks built largely by consortiums of independent telephone companies. Most of these networks were constructed as a way for the telcos to gain cheap fiber transport to the world outside of their operating territories. Many of these smaller telcos were held hostage to incredibly expensive special access transport from the RBOCs which made it difficult for them to buy affordable Internet access. Since these networks were originally built a lot of them now have expanded throughout their operating regions and are now connected to cell towers, large businesses, governments, universities and other customers needing fiber transport.

Most of these ILEC-owned networks have joined together to form INDATEL. Here is a map showing the wide-spread footprint of INDATEL-member networks. Through this consortium many of these networks are now interconnected, providing a nearly nationwide fiber footprint. The various members have POPs in all of the biggest cities in their region but then also go to all of the smaller communities that have largely been ignored by most of the other fiber providers, with perhaps the exception of Level 3.

I have no idea if either Verizon or AT&T has considered buying these networks. For a company like Verizon these fiber routes would provide transport into many areas where they don’t have fiber today. The owners of these networks might want to explore the possibility of selling their networks. Now that the networks are in place the ILECs that built these networks are no longer isolated from the rest of the world. A sale would let them capitalize on their investment in fiber at a time when fiber networks have an all-time high valuation.

Of course, the downside to all of this is that if Verizon, AT&T and a few others like CenturyLink gobble up the few remaining independent fiber networks they will have a virtual monopoly on fiber transport. During the XO and Level 3 purchases there were a lot comments filed with regulators expressing concern about the negative impact on competition from fiber consolidation. I’d hate to see us go back to the bad old days where the only option for transport was a handful of the big telcos.

Broken Promises by Big ISPs

One of the most frustrating things for regulators has to be when giant ISPs renege on regulatory deals they’ve negotiated and don’t follow through with their promises. Books could be written listing all of the times when big ISPs have promised to do something and then never did it.

I am reminded of one such deal when I read that New York City is suing Verizon over its broken promise to bring FiOS fiber to the city. The lawsuit states that almost a million households are still unable to get FiOS, although the company had promised full coverage when they got a franchise from the city in 2008. In that agreement Verizon promised to bring fiber service to the whole city by 2014. The agreement with the city required that Verizon bring fiber, in conduit, directly in front of, behind, or otherwise adjacent to every residential building in the City.

Verizon had a similar longstanding dispute with the State of Pennsylvania. Back in 2002 the company made a promise to bring DSL service to cover 80% of the state as a prerequisite for the company being relieved of a lot of regulatory oversight by the state. But Verizon never completed a lot of the needed upgrades and huge parts of rural Pennsylvania still didn’t have DSL a decade later.

I wrote a blog a few months back about Charter in New York. There the state had found that the cable modems deployed by the company were not technically capable of delivering anything close to the speeds that the company was advertising. Charter agreed to fix the problem, but five years later had made almost no upgrades and was recently sued by the State.

I could list more examples all day long and there have been disputes all across the country with major telcos and cable companies that have made deals with regulators and then either ignored the agreements or only implemented them in a half-hearted manner.

The problem is that there are really no regulatory penalties that are big enough to penalize an ISP for not doing what it promised. There have been fines levied, but those fines are never nearly as big as the profits or savings realized by the ISPs for ignoring the agreements with regulators. For example, it’s unlikely that lawsuits or penalties will be able to force Verizon to finish the FiOS build in New York City. I am sure the company built to the parts of NYC that made economic sense and decided, for whatever reason, that there is not sufficient payback to justify building to the remaining parts of the city.

And that’s what regulators fail to recognize – big ISPs make decisions based upon the anticipated return for stockholders. I think it’s likely that in many of these cases that the big ISPs had no intention of complying with their agreements from the start. The cynical side of me says that they are often willing to take the upsides associated with these kinds of deals – be that decreased regulation or the ability to complete a merger – while knowing up front that they are unlikely to ever complete whatever they have agreed to do.

I think we are likely to see another round of broken promises in a few years as we start moving towards the end of the FCC’s CAF II program. The big telcos accepted over $9 billion over six years to improve rural broadband to speeds of at least 10 Mbps. I’ve been getting feedback from a lot of areas in the country that those deployments seem to be behind schedule. It will certainly come as no surprise if one or more of the big telcos spends the CAF II funding without bringing broadband to the promised households, or else will deliver speeds under the promised levels. The FCC recently issued a warning to carriers telling them that it expects them to fulfill the CAF II commitments – and I suspect that warning is due to the same kind of rumblings I’ve been hearing.

But ultimately the FCC doesn’t really have any way to make these telcos complete the builds. They might withhold future funding from the telcos, but as the FCC keeps eliminating regulation it is going to have very little ability to enforce the original CAF II agreements or to take any steps to really penalize the telcos.

The saddest part of these various broken promises is that millions of real people get hurt. It’s been reported that there are significant pockets of residents in urban areas like New York City that still don’t have even one broadband provider. There are huge rural swaths of the country that are desperate for any kind of broadband, which is what CAF II is supposed to deliver for the first time. But I think we need to be realistic in that big ISPs often do not meet their promises – whether deliberately or not. And perhaps it’s finally time to stop making these big deals with companies that have a history of broken promises.

The Economics of Tower Transport

Many of my clients lease towers and/or fiber transport to reach towers to wireless companies. Since most of my clients operate last-mile networks this is not usually a major source of revenue for them, but it is a significant one, and one of the more profitable things they sell.

I have been advising clients that we are in the midst big changes in the cellular industry and that they should expect payments for cell tower connectivity to start dropping. Transport providers and cell tower owners that won’t renegotiate lower prices could risk losing the business entirely.

Let’s look at AT&T as an example of this. AT&T has been aggressively pushing its vendors to lower prices. At an investor meeting last year AT&T’s president of technology operations told investors that the current industry model is not sustainable. And he is right. As I wrote in a recent blog the entire cellular industry seems to have crossed the threshold where cellular service is becoming a commodity, and that is putting huge pressure on the cellular companies to reduce costs.

Last year FierceWireless posted a letter that AT&T sent to many of vendors telling them to expect to renegotiate rates and terms. In that letter AT&T said that they would pushing for early termination of existing contracts with the expectations of lowering fees. They said they would be looking for the ability to modify or upgrade existing towers for free. And they want to eliminate any automatic price increases and instead have “rents reduced to competitive rates”.

There are two major costs for a cellular company to use somebody else’s tower. First they must lease space on towers including paying for power and space underneath to house equipment. Where AT&T doesn’t own the fiber connecting to the towers they also have to pay for fiber transport to reach the towers. And that transport is not cheap because the bandwidth they need at towers is growing at a torrid pace. Where just five years ago there were very few towers that needed more than a gigabit of bandwidth, I’ve seen rural towers where the carriers are now asking for the right over time to grow to five gigabits. And everything I read about cellular data usage tells me that demand for bandwidth at towers will continue to grow rapidly.

Many of my clients operate in rural areas and some think that their physical isolation makes them immune from any price negotiations with the wireless companies. But I think they are wrong for several reasons.

  • First, I think a lot of the billions being spend by the FCC’s CAF II program is being used to construct fiber to rural towers. AT&T is spending a most of the $2.5 billion from that program to extend fiber into rural areas. And where they build fiber they won’t need to lease it from anybody else.
  • I also suspect that the cellular companies are working with Frontier and CenturyLink, the other two big recipients of CAF II money to piggyback on their fiber expansion to reach cellular towers at a lower cost.
  • Both AT&T and Verizon are also undertaking significant fiber expansion, with one of the goals of that program to cut transport costs. I believe they are doing the math and that they will build fiber to the towers that save them money over the long-run – with those places with the most savings at the top of the list. If they sustain this kind of construction for five or ten years they will eventually be able to bypass most of the towers that they lease today. And the cellular companies should be doing this. If there are going to be lower margins in the cellular business then they ought to use their capital, while they have it, to permanently reduce operating costs.
  • I also suspect that, while AT&T and Verizon are competitors that they are cooperating to reach the more rural cell sites and have transport swap plans in place that save them both money.
  • Finally, these companies have been buying fiber network providers, like Verizon’s purchase last year of XO Communications. It would not be surprising to see them continue to buy companies that provide cell site transport.

The cellular companies and their partners don’t communicate well with smaller transport and cell tower owners. I suspect that many of clients will only get an inkling that a cellular company is going to bypass them when they get the cancellation notice of their contracts. So I have been encouraging folks to reach out to the cellular companies to renegotiate terms and prices. I think that those willing to so might be able to keep this as a long-term revenue stream, but that those that want to stick with higher historical prices will eventually get bypassed and will lose the revenue stream altogether. It’s a tough call, because some places are remote enough that they may never be bypassed – but it’s a crap shoot to guess if your own region is on the fiber-expansion list.

Our Aging Fiber Infrastructure

One thing that I rarely hear talked about is how many of our long-haul fiber networks are aging. The fiber routes that connect our largest cities were mostly built in the 1990s in a very different bandwidth environment. I have a number of clients that rely on long-haul fiber routes and the stories they tell me scare me about our future ability to move bandwidth where it’s needed.

In order to understand the problems of the long-haul networks it’s important to look back at how these fiber routes were built. Many were built by the big telcos. I can remember the ads from AT&T thirty years ago bragging how they had built the first coast-to-coast fiber network. A lot of other fiber networks were built by competitive fiber providers like MCI and Qwest, which saw an opportunity for competing against the pricing of the big telco monopolies.

A lot of the original fibers built on intercity routes were small by today’s standards. The original networks were built to carry voice and much smaller volumes of data than today and many of the fibers contain only 48 pairs of fiber.

To a large degree the big intercity fiber routes follow the same physical paths, either following interstate highways, but to an even greater extent following the railroad tracks that go between markets. Most companies that move big amounts of data want route diversity to protect against fiber cuts or disasters, yet a significant percentage of the routes between many cities are located next to fibers of rival carriers.

It’s also important to understand how the money works in these routes. The owners of the large fibers have found it to be lucrative to lease pairs of fiber to other carriers on long-term leases called IRUs (indefeasible rights to use). It’s not unusual to be able to shop for a broadband connection between primary and secondary markets, say Philadelphia and Harrisburg, and find a half-dozen different carriers. But deeper examination often shows they all share leased pairs in the same fiber sheath.

Our long-haul fiber network infrastructure is physically aging and I’ve seen a lot of evidence of network failures. There are a number of reasons for these failures. First, the quality of fiber glass today has improved by several magnitudes over glass that was made in the 1980s and 1990s. Some fiber routes are starting to show signs of cloudiness from age which kills a given fiber pair. Probably even more significant is the fact that fiber installation techniques have improved over the years. We’ve learned that if a fiber cable is stretched or stressed during installation that microscopic cracks can be formed that slowly spread over time until a fiber becomes unusable. And finally, we are seeing the expected wear and tear on networks. Poles get knocked down by weather or accidents. Contractors occasionally cut buried fibers. Every time a long-haul fiber is cut it loses a little efficiency, and over time splices can add up to become problems.

Probably the parts of the network that are in the worst shape are the electronics. It’s an expensive proposition to upgrade the bandwidth on a long-haul fiber network because that means not only changing lasers at the end points of a fiber, but at all of the repeater huts along a fiber route. Unless a fiber route is completely utilized the companies operating these routes don’t want to spend the capital dollars needed to improve bandwidth. And so they keep operating old electronics that are often many years past their expected functional lives.

Construction of new long-haul fiber networks is incredibly expensive and it’s rare to hear of any major initiative to build fiber on the big established intercity routes. Interestingly, the fiber to smaller markets is in much better shape than the fiber between NFL cities. These secondary fiber routes were often built by groups like consortiums of independent telephone companies. There were also some significant new fiber routes built using the stimulus funding in 2008.

Today a big percentage of the old intercity fiber network is owned by AT&T, Verizon and CenturyLink. They built a lot of the original network but over the years have also gobbled up many of the other companies that built fiber – and are still doing so, like with Verizon’s purchase last year of XO and CenturyLink’s purchase of Level3. I know a lot of my clients worry every time one of these mergers happens because it removes another of a small handful of actual fiber owners from the market. They are fearful that we are going to go back to the old days of monopoly pricing and poor response to service issues – the two issues that prompted most of the construction of competitive fiber routes in the first place.

A lot of the infrastructure of all types in this country is aging. Sadly, I think we need to put a lot of our long-haul fiber backbone network into the aging category.

The Cost of Building 5G

It seems like I can barely browse industry articles these days without seeing another prediction of the cost of providing fast broadband everywhere in the US. The latest study, just released on July 12 from Deloitte, estimates that it will require at least $130 billion over the next seven years in fiber investment to make the country fully ready for 5G.

Before digesting that number it’s important first to understand what they are talking about. Their study looks at deploying a ‘deep fiber’ network that would bring fiber close to homes and businesses in the country and then use wireless technology to complete the connection to homes. This is not a new concept and for decades we have referred to this as fiber-to-the-curb. This network design never went very far in the past because there wasn’t a good wireless technology around to make that final connection. This differs from an all-fiber connection by replacing a fiber drop wire to the home with wireless electronics. The only way such a network makes sense is if that difference is a significant savings over an all-fiber connection at the home.

We are now on the verge of having the needed wireless technology. There are now some first-generation wireless connections being tested that could finally make this a viable network deployment. And like with everything new, within a decade the wireless electronics needed will improve in function and cost a lot less.

To put the Deloitte estimate into perspective Verizon claimed to have spent $13 billion on their original FiOS fiber network. Because they were able to overlash fiber onto their own telephone wires the FiOS network cost was built at a relatively low cost of $750 per customer passed. But the Verizon FiOS network never blanketed any city and instead they selectively cherry-picked neighborhoods where the construction costs were the lowest. Verizon had originally told Wall Street they were going to spend $24 billion on fiber, but they abandoned a lot of the planned construction when the costs came in higher than they had expected.

But back to the Deloitte number of $130 billion. That is the cost of just the fiber needed to get deep into every neighborhood in the country. It doesn’t include the electronics needed to broadcast the wireless signal or the electronics needed inside homes and businesses to receive the signal. Nobody yet has any estimate of what that is going to cost, but it won’t be cheap, at least not for a few years. The cost of getting onto utility poles, street lighting poles or of constructing urban towers is not going to be cheap. And the cost of the electronics won’t be cheap until it’s gone through a few generations of refinement. Using Deloitte’s same methodology of estimating and assuming a very conservatively low cost of $500 for electronics per customer, this would add another $30 billion if only half the customers in the country use the new 5G network.

The big question that must be asked when tossing out a number like $130 billion is if there is anybody who is interested in deploying wireless loops in this manner? Such a network would be used to directly compete against the big cable companies. What Deloitte is talking about is not faster cellular service, but fast connections into homes and businesses. Are there any companies willing to spend that much money to go head-to-head with cable networks that will soon be able to deliver gigabit speeds?

The obvious candidates are Verizon and AT&T. Verizon has been talking a lot lately about this potential business plan, and so perhaps they might pursue it. AT&T, while bragging about the amount of money they are spending on fiber, has not shown a huge inclination to dive back into the residential broadband market. And there are not a lot of companies with capital budgets big enough to consider this.

Consider the capital budgets of the five largest telcos. AT&T is on track to spend $22B in 2017, but a lot of that is being spent in Mexico. Verizon’s 2017 capex budget is around $17B. CenturyLink spends something a little less than $3B. Frontier spends around $1B and Windstream spends about $0.8B.

It’s clear that unless AT&T and Verizon are willing to redirect the majority of their capital spending to this new technology that it’s not going to go anywhere. I think it’s clear that both AT&T and Verizon are going to be looking hard at the technologies and doing trials. But even should those trials be successful I can’t see them pouring the needed billions in to build ‘deep fiber’ everywhere. It’s far more likely that the technology will be deployed in the same way that Verizon deployed FiOS – built only where the cost is the lowest and ignoring everybody else.

Both of these companies understand that it’s not going to be easy to wrestle customers back from the big cable companies. Just building these fiber networks is a daunting financial investment – one that Wall Street would likely punish them for undertaking. But even building the needed networks is not going to be any assurance of market success unless they can convince customers they are a better bargain. I just don’t see these companies going hog wild in making the needed investments to deploy this widely, but instead see this as the newest technology for cherry-picking the best opportunities.

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.

The Fastest ISPs

PC Magazine has been rating ISPs in terms of speed for a number of years. They develop their rankings based upon speed tests taken at their own speed test site. They had about 124,000 speed tests taken that led to this year’s rankings. The scoring for each ISP is a composite number based 80% on the download speed and 20% of upload speeds. To be included in the rankings an ISP needed to have 100 customers or more take the speed test.

You always have to take these kinds of rankings with a grain of salt for several reasons. For example speeds don’t only measure the ISP but also the customer. The time of day can affect the speed test, but probably the type of connection affects it the greatest. We know these days that a lot of people are using out-of-date or poorly located WiFi routers that affect the speeds at their computer.

Measured speeds vary between the different speed tests. In writing this blog I took four different speed tests just to see how they compare. I took the one at the PC Magazine site and it showed my speeds at 27.5 Mbps down / 5.8 Mbps up. I then used Ookla which showed 47.9 Mbps down / 5.8 Mbps up. The Speakeasy speed test showed 17.6 Mbps down and 5.8 Mbps up. Finally, I took the test from Charter Spectrum, my ISP, which showed 31.8 Mbps down / 5.9 Mbps up. That’s a pretty startling set of different speeds measured just minutes apart – and which demonstrates why speed test results are not a great measure of actual speeds. I look at these results and I have no idea what speed I actually am receiving. However, with that said, one would hope that any given speed test would probably be somewhat consistent in measuring the difference between ISPs.

The results of the speed test ‘contest’ are done for different categories of ISPs. For years the winner of the annual speed test for the large incumbents has been Verizon FiOS. However, in this year’s test they fell to third in their group. Leading that category now is Hotwire Communications which largely provides broadband to multi-tenant buildings, with a score of 91.3. Second was Suddenlink at 49.1 with Verizon, Comcast and Cox and closely behind. The lowest in the top 10 was Wow! at a score of 26.7.

Another interesting category is the competitive overbuilders and ISPs. This group is led by Google Fiber with a score of 324.5. EPB Communications, the municipal network in Chattanooga, is second at 136.1. Also in the top 10 are companies like Grande Communications, Sonic.net, RCN, and Comporium.

PC Magazine also ranks ISPs by region and it’s interesting to see how the speeds for a company like Comcast varies in different parts of the country.

Results are also ranked by state. I find some of the numbers on this list startling. For instance, Texas tops the list with a score of 100.3. Next is South Dakota at 80.3 and Vermont at 70.6. If anything this goes to show that the rankings are not any kind of actual random sample – it’s impossible to think that this represents the true composite speeds of all of the people living in those states. The results of this contest also differs from results shown by others like Ookla that looks at millions of actual connection speeds at Internet POPs. Consider Texas. Certainly there are fast broadband speeds in Austin due to Google Fiber where all of the competitors have picked up their game. There are rural parts of the state with fiber networks built by telcos and cooperatives. But a lot of the state looks much like anywhere else and there are a lot of people on DSL or using something less than the top speeds from the cable companies.

But there is one thing this type of study shows very well. It shows that over the years that the cable companies are getting significantly faster. Verizon FiOS used to be far faster than the cable companies and now lies in the middle of a pack with many of them.

This test is clearly not a statistically valid sample. And as I showed above with my results from various speed tests the results are not likely even very accurate. But ISPs care about these kinds of tests because it can give them bragging rights if they are near the top of one of the charts. And, regardless of the flaws, one would think the same shortcomings of this particular test are similar across the board, which means it does provide a decent comparison between ISPs. That is further validated by the fact the results of this exercise are pretty consistent from year to year.

AT&T’s CAF II Solution

We now know the details of AT&T’s fixed broadband solution being installed to satisfy the FCC’s CAF II plan.

Let me start with some numbers to explain the FCC funding from the FCC. In the second round of the CAF II proceeding AT&T accepted a payment from the Universal Service Fund of about $428 million per year for six years, or over $2.5 billion dollars. That money is to be used to bring broadband to about 1.1 million homes. That works out to $2,300 per home.

I saw news last week about an AT&T CAF II ‘trial’ in Georgia. AT&T plans on using existing cellular spectrum to deliver a fixed broadband product. This will require the installation of a small exterior antenna at a customer site as well as the use of an AT&T modem inside of the home.

We’ve known for a while that AT&T planned to utilize their cellular spectrum rather than build or try to upgrade any copper plant, so this is no surprise. What is a bit of a surprise to me is the speeds being offered in the trial. AT&T will be providing a 10 Mbps download speed, which is the bare minimum required by the FCC’s CAF II program. We know from other trials AT&T has had around the country that this technology is capable of delivering at least twice that much bandwidth.

And the service won’t be cheap. The product is priced at $60 per month if a customer will sign a contract, and $70 per month with no contract. It’s a pretty interesting comparison between this and Verizon’s announcement of now offering gigabit speeds throughout its fiber footprint for $70 per month. I didn’t see any mention of a fee for use of the AT&T modem, but most ISPs charge for such devices, so that is probably going to be added to the price.

The AT&T product also comes with severe data caps. It comes with a monthly data cap of 160 gigabytes of total download. Overages will cost $10 for each additional 50 gigabytes, up to a maximum of $200 per month. I suspect a lot of rural homes that buy this as their first broadband product are going to be shocked at their first bill when they splurge on watching Netflix for the first time. My 3-person household uses about 700 gigabytes per month, which under this plan would cost $170 per month for somebody with a contract.

Like with all ISPs, I’m sure that the 10 Mbps data speed is undoubtedly best effort, meaning that at peak times (or if customers are too far away from a cellular tower) the speeds will be slower. That slow speed is going to severely hamper the ability for customers to use huge amounts of data since they aren’t easily going to be able to watch many simultaneous video streams.

I can’t be entirely negative, because for many households this will be their first broadband product, other than perhaps satellite data, which is largely unusable. And so to these homes it’s going to feel great to finally be able to stream data or have their kids able to do on-line homework from their homes.

But what is irksome about this product is that the federal government handed AT&T the money to do this. Certainly they will use some of the $2,300 per customer to build some new towers or to build a little fiber to towers. But the equipment to serve a customer is going to cost a lot less than this. I would bet that most customers will be served from existing towers using existing spectrum. This means that the federal government is paying for the full cost of implementing this product, but for which AT&T will reap all of the revenues and profits. That’s a pretty handsome return on investment for AT&T and amounts to an unneeded handout to one of the richest companies in the country.

Customers are going to quickly understand that, while they now have a minimal broadband capability, they don’t have anything close to the same broadband that much of the rest of the country has. Almost all of the big cable companies now sell broadband with minimum speeds of at least 50 Mbps download, often more. As households keep needing more data capacity over time – with the average household use of data doubling every three years – this AT&T product will become the broadband equivalent of dial-up within a decade.

The worst thing about this whole fiasco from my perspective is that the FCC is take big credit for bringing broadband to the parts of the country who get this kind of CAF II product, and they will probably count this as a job well done. Instead the FCC will have spent many billions on foisting broadband into rural America that is obsolete before it’s even launched. The shame is that this same money could have been used to seed matching grants in rural America that would have built fiber to a lot of these same homes. Small ISPs and telcos got excited when they first heard of the reverse auctions for the CAF II funding. But then, rather than holding those auctions, the FCC just handed this money to the big telcos with no competition for the funding – and this AT&T product is the end result of that bad decision.

Rural America is not going to be long fooled and will quickly recognize this as inferior broadband, but they are going to have no real alternatives. There is the small hope that there might be an infrastructure program from the current administration and Congress, but there is no assurance that such money might not also go to the big ISPs to do more of the same.

The End of Data Privacy?

Congress just passed a law that reverses the privacy rules that were ordered by the prior FCC. Those rules were recently put on hold by the current FCC and this new laws makes sure the privacy rules never go into effect. Congress did this to ensure that a future FCC cannot implement privacy rules without Congressional approval. It’s important to note that this law applies equally to both terrestrial and cellular broadband.

On paper this law doesn’t change anything since the FCC privacy rules never went into effect. However, even before the prior FCC adopted the privacy rules they had been confronting ISPs over privacy issues which kept the biggest ISPs from going too far with using customer data. Just the threat of regulation has curbed the worst abuses.

How will the big ISPs be likely to now use customer data? We don’t have to speculate too hard because some of them have already used customer data in various ways in the recent past, all of which seem to be allowable under this new law.

Selling Data to Marketers. This is the number one opportunity for big ISPs. Companies like Facebook and Google have been mining customer data, but they can only do that when somebody is inside their platforms – they have no idea what else you do outside their domains. But your ISP can know every keystroke you make, every email your write, every website you visit, and with a cellphone, every place you’ve been. With deep data mining ISPs can know everything about your on-line life.

We know some of the big ISPs have already been mining customer data. For example, last year AT&T offered to sell connections that were not monitored for a premium price. AT&T also has a product that has been selling masses of customer phone and data usage to federal and local law enforcement. Probably other ISPs have been doing this as well, but this has been a well-guarded secret.

Inserting Ads. This is another big revenue opportunity for the ISPs. The companies will be able to create detailed profiles of customers and then sell targeted advertising to reach specific customers. Today Google and a few other large advertising companies dominate the online advertising business of inserting ads into web sites. With the constraints off, the big ISPs can enter this business since they will have better customer profiles than anybody else. We know that both AT&T and Charter have already been doing this.

Hijacking Customer Searches. Back in 2011 a bunch of large ISPs like Charter, Frontier and others were caught hijacking customer DNS searches. When customers would hit buttons on web sites or on embedded links in articles the ISPs would sometimes send users to a different web site than the one they thought they were selecting. The FCC told these companies to stop the practice then, but the new law probably allows the practice again.

Inserting Supercookies. Verizon Wireless inserted Supercookies on cellphones back in 2014. AT&T started to do this as well but quickly backed off when the FCC came down hard on Verizon. These were undetectable and undeletable cookies that allowed the company to track customer behavior. The advantage of the supercookies is that they bypass most security schemes since they grab customer info before it can be encrypted or sent through a secure connection. For example, this let the company easily track customers with iPhones.

Pre-installing Tracking Software on Cellphones. And even better than supercookies is putting software on all new phones that directly snags data before it can be encrypted. AT&T, T-Mobile and Sprint all did this in the past – just using a different approach than supercookies. The pre-installed software would log things like every website visited and sent the data back to the cellular carriers.