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The End of Google Fiber Expansion: Where Did It All Go Wrong?

Alphabet, the parent company of Google Fiber, has lost interest in expanding its fiber to the home service and is showing signs of pulling the plug on its cable television alternative while it drags its feet on keeping promised rollout commitments.

The first sign of trouble for the upstart fiber network came as early as 2015, when without warning Google co-founder Larry Page suddenly unveiled Alphabet, a new holding company that would be at the heart of Google and its many ventures, including Google Fiber. The concept was tailor-made to please Wall Street and investors, because it would better expose which Google projects were earning money and which were hemorrhaging cash with no sign of profitability. But an equally important event occurred in May with the hiring of Ruth Porat, who would become Alphabet’s chief financial officer.

Known inside by some at Google as “Ruthless Ruth,” Porat is Wall Street’s definition of a proper executive that keeps shareholder interests first in mind. Porat lead Morgan Stanley’s technology banking division at the heart of the first dot.com boom in the late 1990s, served as an adviser to the Treasury Department on the taxpayer bailouts of Fannie Mae and Freddie Mac, and was chief financial officer at Morgan Stanley by 2010. Her mission at Google: put an end to expensive innovation for innovation’s sake. If a project did not show signs of making money for shareholders, it would face intense scrutiny under her watch.

“She’s a hatchet man,” a former senior Alphabet executive frankly told Bloomberg News.

Porat

Her key priorities are “discipline” and “focus,” something Google never had to be concerned with while earning truckloads of ad-click cash. Google’s reputation for cool innovation and free services earned the company a lot of goodwill with the public, but that left money on the table for investors who want the company to step up shareholder value. Google’s founders Sergey Brin and Larry Page had enjoyed a long run innovating and announcing new projects, including scanning every printed book on the planet, giving away e-mail and office apps, and laying fiber optic cables to deliver the kind of internet service big phone and cable companies were not delivering. The company also acquired other innovators, including Nest Labs — which made connected thermostats and Webpass, which provides wireless high-speed internet access.

But for all of its success, Google also had several high-profile failures that cost billions, setting the stage for future project accountability.

One of the biggest failures was its Google Glass wearable tech project. The first edition, dubbed Explorer, was a flop and received terrible reviews. But the device also clashed with a country increasingly preoccupied with personal privacy. Not everyone appreciated Google Glass’ always-watching camera pointing in their direction, and some wearing the device were derided as “glassholes.”

“I was a Google Glass Explorer, and the experience was horrible from the start. Google Glass now sits in my office museum of failed products,” said Tim Bajarin, President of Creative Strategies Inc. in this post at re/code. “The UI was terrible, the connection unreliable and the info it delivered had little use to me. It was the worst $1,500 I have ever spent in my life. On the other hand, as a researcher, it was a great tool to help me understand what not to do when creating a product for the consumer.”

Google Glass: a major misstep

Google’s other experiments weren’t exactly pulling in a lot of money either. The company’s vision of driver-less cars met the reality of real world driving conditions (some accidents were the result) and traffic planning and safety regulators were cautious about giving a green light to the concept on American streets and highways. A long-time favorite project of Brin and Page, Project Loon — sending 100,000 balloons, blimps, and/or drones into the sky to deliver internet access is still seen by conventional wisdom as weird. These and other experimental projects lost $3.6 billion of Google’s revenue in 2016, almost twice as much as they lost the company in 2014.

After “Ruthless Ruth” entered the picture, as Bloomberg News documented, it appeared the open door to the experiment lab was closed and an exodus of project leaders and engineers began:

Six months after Teller’s rousing speech, Loon’s Mike Cassidy stepped down as project leader. Around the same time, Urmson, the self-driving car engineer, left Alphabet, as did David Vos, the head of X’s drone effort, Project Wing. Vos’s top deputy, Sean Mullaney, left the company as well. Other recent departures: Craig Barratt, chief executive officer of Access, its telecom division; Bill Maris, the CEO of its venture capital arm, GV; and Tony Fadell, the CEO of smart-thermostat company Nest, who was also working on a reboot of Google Glass. That project, now called Aura, also lost its leads of user design and engineering.

Barratt: The former head of Google Access.

The bean counters also arrived at Google Access — the division responsible for Google Fiber — and by October 2016, Google simultaneously announced it was putting a hold on further expansion of Google Fiber and its CEO, Craig Barratt, was leaving the company. About 10% of employees in the division involuntarily left with him. Insufficiently satisfied with those cutbacks, additional measures were announced in April 2017 including the departure of Milo Medin, a vice president at Google Access and Dennis Kish, a wireless infrastructure veteran who was president of Google Fiber. Nearly 600 Google Access employees were also reassigned to other divisions. Medin was a Google Fiber evangelist in Washington, and often spoke about the impact Google’s fiber project would have on broadband competition and the digital economy.

Porat’s philosophy had a sweeping impact on Alphabet and its various divisions. The most visionary/experimental projects that were originally green-lit with no expectation of making money for a decade or more now required a plan to prove profitability in five years or less. Wall Street was delighted and Alphabet’s stock was up 35% since “Ruthless Ruth” arrived, winning praise for remaking Alphabet/Google into a conventional American corporation using familiar corporate principles.

But Alphabet’s transition seems to break a promise Google co-founders Brin and Page made when Google became a public company in 2004.

“We do not intend to become one.”

Both men promised Google would never focus on short-term profitability and would encourage employees to devote 20% of their working hours on exactly the kinds of innovative projects and product developments Porat was intent on cutting or killing. Porat even has a willing army of helpers — executives were paid bonuses to kill their projects before expenses got out of hand. This helped halt development of Tableau, a project to create enormous size TV screens originally championed by Brin.

Porat also had a major hand in slashing the budget at Google’s Nest Labs division. Google spent $3.2 billion acquiring the home thermostat and smoke alarm company in 2014. Nest CEO Tony Fadell came along as part of the deal and was initially considered a major asset, having been the former Apple engineer who built the original iPod prototype. But Fadell clashed with Google’s culture and reports surfaced he was a tyrannical boss comparable to Steve Jobs at his nastiest. Google executives expected more products out of the Nest division, and didn’t get them. Fadell blamed employees and ruthless budget cuts that broke Google’s commitment to allow Nest to lose up to $500 million annually for the first five years under Google’s ownership. Even when Nest managed to generated $340 million in revenue in 2015, Porat wasn’t pleased. The higher-ups expected more considering the amount of money Google spent buying Nest Labs.

Google Fiber was launched knowing it would take billions of dollars and years to pay off for Google. Laying fiber optic cable is expensive, time-consuming, and frequently bureaucratic. Google projects that still have support from Brin and Page are usually protected from Porat’s red pencil, but if either’s optimism waivers, Porat is likely to start cutting.

By the time Barratt tried to jump-start excitement for the slowly progressing fiber service by announcing a series of new launch cities, Page appeared to have lost interest. Former employees say Page became frustrated with Google Fiber’s lack of progress.

“Larry just thought it wasn’t game-changing enough,” says a former Page adviser. “There’s no flying-saucer shit in laying fiber.”

Charter Communications took out newspaper ads trumpeting Google’s abandonment of some of its potential fiber customers in Kansas City.

Left unprotected, Porat’s budget cutters invaded and further fiber expansion has been suspended, except in areas where Google was already committed to provide the service. But the cutbacks have been so significant, cities are now complaining Google is dragging its feet on its commitments.

In Kansas City — the first to get Google Fiber, the network remains incomplete. In March 2017, Google signaled it was likely to remain incomplete indefinitely after returning hundreds of $10 deposits — many paid years earlier — to residents who were informed Google Fiber would no longer expand into their neighborhoods. In the last two years, Google has become very conservative about the neighborhoods where it will expand service. In most cases, the company now targets multi-dwelling units like condos and apartments, which are cheaper to serve than single family homes.

In late September, Atlanta noticed Google Fiber was stalled in the city and nearby Sandy Springs and Brookhaven. A clear sign Google had effectively suspended construction was a sudden end to construction permit applications around six months ago. Google Fiber denies it is pulling out, but city officials notice work progress has slowed to a crawl.

“Google Fiber is currently available in over 100 residential buildings in the metro Atlanta area and in several neighborhoods in the center of the city. We’re working hard to connect as many people as possible, and encourage people to sign up for updates on our website,” a Google Fiber spokesperson said.

There have been similar problems with Google Fiber expansion in several Texas cities. Some neighborhood residents complained about shoddy installation work because of poor quality third-party contractors, and expansion has slowed down markedly in many areas.

Ironically, AT&T may have been responsible for helping kill Page’s enthusiasm for Google Fiber, serving as a regular obstacle to Google Fiber’s expansion in states like Tennessee where it has been delayed by bureaucratic pole attachment disputes, some resulting in legal action. For Ma Bell and its progeny, a five-year delay is nothing for a company that has been around since the early 1900s and took decades to build out its original telephone network.

Google Fiber Huts – Nashville, Tenn.

Utilities employ a small army of workers that do nothing but deal in a world of tariffs, permit applications, and various filings to regulatory bodies that still govern parts of their operations. For a dot.com company in a hurry, filing permit applications, negotiating pole attachment agreements, hiring subcontractors that can meet regulated specifications, and dealing with incomplete or inaccurate infrastructure maps could be hell on earth. But for phone and cable companies, it is just another day on the job, and their “concern trolling” over the danger of allowing a neophyte like Google to mess with existing electric, phone, and cable wiring to make room for fiber did give some local officials pause.

Page’s hurry to accomplish his fiber dreams were effectively dashed by AT&T’s very close relationship with local officials and its ability to generate a mountain of regulatory and legal paperwork. As a result, Google admitted with great frustration that in Nashville, after months of work, it had only upgraded 33 telephone poles out of 88,000 in the city. The delay also took its toll on a Nashville-based subcontractor helping to build out Google Fiber in the city. Phoenix of Tennessee declared Chapter 11 bankruptcy in September with liabilities between $1-10 million. It also laid off 70 employees. The reason? Google Fiber is stalled in the city.

One Alphabet employee mischaracterized the end effect of the dispute in comments to the Wall Street Journal last year, “Everyone who has done fiber to the home has given up because it costs way too much money and takes way too much time.”

Christopher Mitchell, director of the Community Broadband Project summarized the situation more succinctly for Gizmodo: “the new guy gets screwed.

Yet it would be more accurate to say companies with short attention spans and an evolving commitment away from innovation and towards Wall Street and its fixation on short-term results will have more difficulty than other companies and communities that have successfully built fiber networks with a patient focus on the future.

Porat has been defending Alphabet’s increasingly conservative spending plans and pull-backs.

“As we reach for moonshots,” she told investors on a financial results conference call, “it’s inevitable that there will be course corrections along the way.” She called some of the shifting priorities and cutbacks “taking a pause” in some areas of business to “lay the foundation for a stronger future.”

For Google Fiber, that is coming in a number of different directions.

The company this week announced it is pulling back on offering cable television service in its new markets, including Louisville, Ky., and San Antonio, Tex., and is raising rates $20-30 a month for bundled customers in areas where television service is still being sold.

“The cost of providing TV programming continues to rise,” the company said in an email notifying customers of the rate increase. The price change will hit existing customers paying $130 a month for Fiber 1000Mbps service + TV. Current customers will pay $150 a month going forward. New customers will pay $10 more for the bundle – $160 a month.

“We’re not afraid to try new things as part of our normal way of doing business, focused on the end goal of getting superfast internet into people’s homes,” wrote head of sales and marketing for Google Access Cathy Fogler in a blog post.

Google Fiber has been a minor player in the cable television business, according to analysts, attracting around 54,000 customers nationwide as of December — only 24,000 more than it had in 2014.

As for the future, with Porat in charge of finances, it is likely Google will downscale expectations and rely on its acquisition of Webpass for future expansion, providing high-speed wireless internet to multi-dwelling apartments, condos, and businesses in dense urban areas. That eliminates costly fiber expansion to individual homes or businesses and is much less expensive to install and maintain.

Any plans for a major Google Fiber push in the future seems unlikely, considering Wall Street’s demands for Return On Investment are not easily tempered. That leaves independent local overbuilders with established ties to their communities the most likely to pick up where Google Fiber has left off. But even those are in short supply. Like any major project of this scope, the best option for getting fiber optics in your community, assuming the local cable or phone company isn’t doing it already, is to treat it as a public infrastructure project like water, sewer, roads or sidewalks.

Most cities were all too happy to compete for Google’s attention (and infrastructure investment). But now that is no longer likely, and many communities will have to decide for themselves which side of the digital divide they want to live in — the side without 21st century broadband or the side that has elected to control their own broadband future and not wait for someone else to get the job done.

FCC Chairman Ajit Pai Wins New 5-Year Term With Republican Support

‘I win’ — Pai wins a second 5-year term at the FCC.

Republicans in the U.S. Senate on Monday confirmed Federal Communications Commission Chairman Ajit Pai for a second five-year term at the regulatory agency at a time when he is in the process of dismantling the legacy left by the former Obama Administration, which introduced consumer telecommunications reforms and mandated Net Neutrality.

Pai won confirmation with unanimous Republican support, joined by four Democrats — Sens. Jon Tester (Mont.), Gary Peters (Mich.), Joe Manchin (W.V.), and Claire McCaskill (Mo.). Every other Democrat in attendance opposed his nomination, many raising serious doubts about his performance and regulator philosophy. Pai was a former lawyer for Verizon and has delivered policy speeches sponsored by large corporate interests, including Americans for Prosperity, which has close ties to the Koch Bros.

Although Pai promised in a statement after the vote he would continue to focus on “bridging the digital divide, promoting innovation, protecting consumers and public safety, and making the FCC more open and transparent,” his critics complain he has spent most of his time repealing Obama era rules and regulations to erase the legacy of his predecessor Thomas Wheeler.

Pai is widely expected to preside over the elimination of Net Neutrality/Open Internet protections, despite millions of objections from ordinary Americans who wrote the FCC in historic numbers. Most requested the agency preserve the rules that prevent internet providers from establishing paid fast lanes and speed throttles.

Pai “has established a clear record of favoring big corporations at the expense of consumers, innovators, and small businesses,” Senate Democratic Leader Chuck Schumer said.

Senate roll call vote on the nomination of Ajit Pai for another 5-year term.

The current FCC chairman has also received withering criticism from consumer and public interest groups for his apparent close ties to Sinclair Broadcast Group, which itself has ties to the Trump Administration. Critics accuse Pai of engineering FCC rule changes that closely coincide with the business agenda of Sinclair, the nation’s largest owner of local television stations. Sinclair is currently awaiting FCC approval of its acquisition of Tribune Media, which will include local stations serving major cities including New York, Chicago, and Los Angeles.

Sen. Elizabeth Warren (D-Mass.) was particularly critical of Pai’s performance, suggesting he was little more than a corporate tool:

“As powerful companies know, it is good to have friends on the inside and they have invested a lot of money in making friends. Giant corporations have spent unlimited amounts of money to elect politicians who will promote their views and to flood Congress with lobbyists who will work around the clock to destroy laws and rules that the industry doesn’t like and to reshape those laws to suit corporate interests.

“[…] Powerful corporations need weak agencies that won’t hold them accountable, so they work to fill those agencies with their allies — friends who can undo the rules that giant corporations don’t like. Friends who won’t go after those companies when they throw the rules out the window to make an extra buck. The FCC is one of the agencies that has been on their hit list for a long time, and now they see their opportunity to execute a corporate takeover of the FCC, and they started at the top with Ajit Pai, President Trump’s pick to chair the FCC. Since his appointment as chair of the FCC, Chairman Pai has worked at breakneck speed to transform the FCC from an agency that works in the public interest to a big business support group.”

Sen. Elizabeth Warren (D-Mass.) explains her reasons why she doesn’t support the nomination of FCC Chairman Ajit Pai for another five-year term. (8:43)

Despite Net Neutrality, Providers Launch Fiber Spending Spree

Despite claims from some industry-backed researchers and former members of Congress that Net Neutrality has reduced investment in telecommunications, a new research note from Deutsche Bank shows America’s top telephone and cable companies are spending billions on fiber upgrades to power wireless, business, and consumer broadband.

“Telecoms have become much more public signaling their intent to increase fiber investment, with AT&T and Verizon leading the spending ramp,” reports Deutsche Bank Markets Research.

Verizon has been on a fiber spending spree in the northeastern United States, signing contracts with Corning and Prysmian worth $1.3 billion to guarantee a steady supply of 2.5 million miles of fiber optic cable Verizon plans to buy over the next three years. Much of that spending allows Verizon to lay a foundation for its future 5G wireless services, which will require fiber to the neighborhood networks. But in cities like Boston, Verizon is also once again expanding its FiOS fiber to the home service to consumers.

AT&T is committed to connecting 12.5 million homes to gigabit-ready fiber broadband by 2019 — part of a deal it made with the FCC to win approval of its acquisition of DirecTV. AT&T claims it has already connected 5.5 million homes to its gigabit AT&T Fiber network, expected to reach 7 million by the end of this year.

Deutsche Bank thinks providers’ future drive towards 5G service will also simultaneously benefit fiber to the home expansion, because the same fiber network can power both services.

“To support the upcoming innovations such as autonomous driving, IoT, smart cities, the US needs to densify its fiber network,” Deutsche Bank said. “The U.S. fiber penetration rate is 20% vs. 75% for leading OECD countries, which suggests a large gap needs to be closed.”

Altice founder Patrick Drahi (second from left) and Altice USA CEO Dexter Goei (center) visit a Cablevision fiber deployment on Long Island, N.Y.

The bank predicts companies will spend around $175 billion over the next 10 years building out their fiber networks, with most of the spending coming from the phone companies, who may see fiber buildouts as their best attempt to level the playing field with cable operators’ hybrid fiber-coaxial cable networks. As cable operators expand their networks to reach more business parks, they have been gradually stealing market share for phone and data services from phone companies. Consumer broadband is also increasingly dominated by cable operators in areas where phone companies still rely on selling DSL services.

FierceCable notes Comcast and Altice have stepped up aggressive spending on fiber networks for their consumer and business customers. Altice is planning to decommission Cablevision’s existing coaxial cable network and move customers to fiber-to-the-home service. Comcast is deploying fiber services while still selling traditional cable broadband upgraded to DOCSIS 3.1, which supports substantially faster broadband speeds. The two networks co-exist side-by-side. Customer need dictates which network Comcast will use to supply service.

Customers benefit differently in each state, depending on what type of service is available. Comcast’s large footprint in Pennsylvania, outside of Philadelphia, is usually served by traditional coaxial cable. Verizon still sells DSL in much of the state. In Massachusetts, Verizon is building out its FiOS network to serve metro Boston while Comcast will depend on DOCSIS 3.1 upgrades to speed up its internet service. In New Jersey, long a battleground for Verizon’s FiOS service the company stopped aggressively expanding several years ago, Comcast has announced DOCSIS 3.1 upgrades for the entire state.

Independent phone companies are also seeing a bleak future without fiber upgrades. Both CenturyLink and Windstream are planning moderately aggressive fiber expansion, particularly in urban service areas and where they face fierce cable competition. Frontier continues its more modest approach to fiber expansion, usually placing fiber in new housing developments and in places where its copper facilities have been severely damaged or have to be relocated because of infrastructure projects.

None of the companies have cited Net Neutrality as a factor in their future broadband expansion plans. In fact, fiber networks have opened the door to new business opportunities to the companies installing them, and the high-capacity networks are likely to further reduce traffic/transit costs, while boosting speeds. That undercuts the business model of selling digital slow and fast lanes.

Bell Surprises Potential Fiber to the Home Customers With Fiber-Free Candy

Phillip Dampier October 2, 2017 Bell (Canada), Canada, Competition, Consumer News No Comments

Bell’s “candy bribe” (Image: VHS)

Bell is dispatching boxes of fiber-free candy to potential customers of its fiber-to-the-home Fibe service.

A member of DSL Reports noted Bell’s fiber was installed in his condo building in Toronto for a year, but only now has Bell gotten around to activate it.

“Bell sent me this package of candy to let me know I can sign up for Fibe,” the user ‘VHS’ noted. “Kind of funny they offered me candy.”

More amusing is the fact the candy is entirely free of any dietary fiber.

Bell’s marketing and sales teams are notorious for getting ahead of themselves, often selling service by mail and door to door that isn’t actually yet available in the area. Some customers complain they finally relent to an intense marketing campaign and wait around for an installer that never arrives, only learning later their installation order was canceled without explanation.

Internet’s Biggest Frauds: Traffic Tsunamis and Usage-Based Pricing

Providers’ tall tales.

Year after year, equipment manufacturers and internet service providers trot out predictions of a storm surge of internet traffic threatening to overwhelm the internet as we know it. But growing evidence suggests such scare stories are more about lining the pockets of those predicting traffic tsunamis and the providers that use them to justify raising your internet bill.

This month, Cisco — one of the country’s largest internet equipment suppliers, released its latest predictions of astounding internet traffic growth. The company is so confident its annual predictions of traffic deluges are real it branded a term it likes to use to describe it: The Zettabyte Era. (A zettabyte, for those who don’t know, is one sextillion bytes, or perhaps more comfortably expressed as one trillion gigabytes.)

Cisco’s business thrives on scaring network engineers with predictions that customers will overwhelm their broadband networks unless they upgrade their equipment now, as in ‘right now!‘ In turn, the broadband industry’s bean counters find predictions of traffic explosions useful to justify revenue enhancers like usage caps, usage-based billing, and constant rate increases.

“As we make these and other investments, we periodically need to adjust prices due to increases [in] business costs,” wrote Comcast executive Sharon Powell in a letter defending a broad rate increase imposed on customers in Philadelphia late last year.

In 2015, as that cable company was expanding its usage caps to more markets, spokesman Charlie Douglas tried to justify the usage caps claiming, “When you have 10 percent of the customers consuming 50 percent of the network bandwidth, it’s only fair that those consumers should pay more.”

When Cisco released its 2017 predictions of internet traffic growth, once again it suggests a lot more data will need to be accommodated across America’s broadband and wireless networks. But broadband expert Dave Burstein has a good memory based on his long involvement in the industry and the data he saw from Cisco actually deflates internet traffic panic, and more importantly provider arguments for higher cost, usage-capped internet access.

“Peak Internet growth may have been a couple of years ago,” wrote Burstein. “For more than a decade, internet traffic went up ~40% every year. Cisco’s VNI, the most accurate numbers available, sees growth this year down to 27% on landlines and falling to 15-20% many places over the next few years. Mobile growth is staying higher — 40-50% worldwide. Fortunately, mobile technology is moving even faster. With today’s level of [provider investments], LTE networks can increase capacity 10x to 15x.”

According to Burstein, Cisco’s estimates for mobile traffic in the U.S. and Canada in 2020 is 4,525 petabytes and in 2021 is 5,883 petabytes. That’s a 30% growth rate. Total consumer traffic in the U.S. and Canada Cisco sees as 48,224 petabytes and 56,470 petabytes in 2021. That’s a 17% growth rate, which is much lower on wired networks.

Burstein’s findings are in agreement with those of Professor Andrew Odlyzko, who has debunked “exaflood/data tsunami” scare stories for over a decade.

“[The] growth rate has been decreasing for almost two decades,” Odlyzko wrote in a 2016 paper published in IPSI BgD Transactions. “Even the growth rate in wireless data, which was extremely high in the last few years, shows clear signs of a decline. There is still rapid growth, but it is simply not at the rates observed earlier, or hoped for by many promoters of new technologies and business methods.”

Burstein

The growth slowdown, according to Odlyzko, actually began all the way back in 1997, providing the first warning the dot.com bubble of the time was preparing to burst. He argued the data models used by equipment manufacturers and the broadband industry to measure growth have been flawed for a long time.

When new internet trends became popular, assumptions were made about what impact they would have, but few models accurately predicted whether those trends would remain a major factor for internet traffic over the long-term.

Peer-to-peer file sharing, one of the first technologies Comcast attempted to use as a justification for its original 250GB usage cap, is now considered almost a footnote among the applications having a current profound impact on internet traffic. Video game play, also occasionally mentioned as a justification for usage caps or network management like speed throttling, was hardly ever a major factor for traffic slowdowns, and most games today exchange player actions using the smallest amount of traffic possible to ensure games are fast and responsive. In fact, the most impact video games have on the internet is the size of downloads required to acquire and update them.

Odlyzko also debunked alarmist predictions of traffic overloads coming from the two newest and largest traffic contributors of the period 2001-2010 — cloud backups and online video.

Odlyzko

“Actual traffic trends falsified this conjecture, as the first decade of the 21st century witnessed a substantial [traffic growth rate] slowdown,” said Odlyzko. “The frequent predictions about ‘exafloods’ overwhelming the networks that were frequent a decade ago have simply not come to pass. At the 20 to 30% per year growth rates that are observed today in industrialized countries, technology is advancing faster than demand, so there is no need for increasing the volume of investments, or for the fine-grained traffic control schemes that are beloved by industry managers as well as researchers.”

That’s a hard pill to swallow for companies that manufacture equipment designed to “manage,” throttle, cap, and charge customers based on their overusage of the internet. It also gives fits to industry executives, lobbyists, and the well paid public policy researchers that produce on spec studies and reports attempting to justify such schemes. But the numbers don’t lie, even if the industry does.

Although a lot of growth measured these days comes from wireless networks, they are not immune to growth slowdowns either. The arrival of the smartphone was hailed by wireless companies and Wall Street as a rocket engine to propel wireless revenue sky high. Company presidents even based part of their business plans on revenue earned from monetizing data usage allegedly to pay for spectrum acquisitions and upgrades.

McAdam

Verizon’s CEO Lowell McAdam told investors as late as a year ago “unlimited data” could never work on Verizon Wireless again.

“With unlimited, it’s the physics that breaks it,” he said. “If you allow unlimited usage, you just run out of gas.”

The laws of physics must have changed this year when Verizon reintroduced unlimited data for its wireless customers.

John Wells, then vice president of public affairs for CTIA, the wireless industry’s top lobbying group, argued back in 2010 AT&T’s decision to establish pricing tiers was a legitimate way for carriers to manage the ‘explosive growth in data usage.’ Wells complained the FCC was taking too long to free up critically needed wireless spectrum, so they needed “other tools” to manage their networks.

“This is one of the measures that carriers are considering to make sure everyone has a fair and equal experience,” Walls said, forgetting to mention the wireless industry was cashing in on wireless data revenue, which increased from $8.5 billion annually in 2005 to $41.5 billion in 2009, and Wall Street was demanding more.

“There were again many cries about unsustainable trends, and demands for more spectrum (even though the most ambitious conceivable re-allocation of spectrum would have at most doubled the cellular bands, which would have accommodated only a year of the projected 100+% annual growth),” Odlyzko noted.

What the industry and Wall Street did not fully account for is that their economic models and pricing had the effect of modifying consumer behavior and changed internet traffic growth rates. Odlyzko cites the end of unlimited data plans and the introduction of “tight data caps” as an obvious factor in slowing down wireless traffic growth.

“But there were probably other significant ones,” Odlyzko wrote. “For example, mobile devices have to cope not just with limited transmission capacity, but also with small screens, battery
limits, and the like. This may have led to changes of behavior not just of users, but also of app developers. They likely have been working on services that can function well with modest
bandwidth.”

“U.S. wireless data traffic, which more than doubled from 2012 to 2013, increased just 26% from 2013 to 2014,” Odylzko reported. “This was a surprise to many observers, especially since there is still more than 10 times as much wireline Internet traffic than wireless Internet traffic.”

Many believe that was around the same time smartphones achieved peak penetration in the marketplace. Virtually everyone who wanted a smartphone had one by 2014, and as a result of fewer first-time users on their networks, data traffic growth slowed. At the same time, some Wall Street analysts also began to worry the companies were reaching peak revenue per user, meaning there was nothing significant to sell wireless customers that they didn’t already have. At that point, future revenue growth would come primarily from rate increases and poaching customers from competitors. Or, as some providers hoped, further monetizing data usage.

The Net Neutrality debate has kept most companies from “innovating” with internet traffic “fast lanes” and other monetization schemes out of fear of stoking political blowback. Wireless companies could make significant revenue trying to sell customers performance boosters like higher priority access on a cell tower or avoiding a speed throttle that compromised video quality. But until providers have a better idea whether the current administration’s efforts to neuter Net Neutrality are going to be successful, some have satisfied themselves with zero rating schemes and bundling that offer customers content without a data caps or usage billing or access to discounted packages of TV services like DirecTV Now.

Verizon is also betting its millions that “content is king” and the next generation of revenue enhancers will come from owning and distributing exclusive video content it can offer its customers.

Odlyzko believes providers are continuing the mistake of stubbornly insisting on acquiring or at least charging content providers for streaming content across their networks. That debate began more than a decade ago when then SBC/AT&T CEO Edward Whitacre Jr. insisted content companies like Netflix were not going to use AT&T’s “pipes for free.”

“Much of the current preoccupation of telecom service providers with content can be explained away as following historical precedents, succumbing to the glamour of ‘content,'” Odlyzko wrote. “But there is likely another pressing reason that applies today. With connection speeds growing, and the ability to charge according to the value of traffic being constrained either directly by laws and regulations, or the fear of such, the industry is in a desperate search for ways not to be a ‘dumb pipe.'”

AT&T and Verizon: The Doublemint Twins of Wireless

A number of Wall Street analysts also fear common carrier telecom companies are a revenue growth ‘dead-end,’ offering up a commodity service about as exciting as electricity. Customers given a choice between AT&T, Verizon, Sprint, or T-Mobile need something to differentiate one network from the other. Verizon Wireless claims it has a best in class LTE network with solid rural coverage. AT&T offers bundling opportunities with its home broadband and DirecTV satellite service. Sprint is opting to be the low price leader, and T-Mobile keeps its customers with a network that outperforms expectations and pitches constant promotions and giveaways to customers that crave constant gratification and change.

The theory goes that acquiring video content will drive data usage revenue, further differentiate providers, and keep customers from switching to a competitor. But Odylzko predicts these acquisitions and offerings will ultimately fail to make much difference.

“Dumb pipes’ [are] precisely what society needs,” Odylzko claims and in his view it is the telecom industry alone that has the “non-trivial skills” required to provide ubiquitous reliable broadband. The industry also ignores the utility-like built-in advantage it has owning pre-existing wireline and wireless networks. The amortized costs of network infrastructure often built decades ago offers natural protection from marketplace disruptors that likely lack the fortitude to spend billions of dollars required to invade markets with newly constructed networks of their own.

Odylzko is also critical of the industry’s ongoing failure of imagination.

Stop the Cap! calls that the industry’s “broadband scarcity” business model. It is predicated on the idea that broadband is a limited resource that must be carefully managed and, in some cases, metered. Companies like Cox and Comcast now usage-cap their customers and deter them from exceeding their allowance with overlimit penalties. AT&T subjectively usage caps their customers as well, but strictly enforces caps only for its legacy DSL customers. Charter Communications sells Spectrum customers on the idea of a one-size fits all, faster broadband option, but then strongly repels those looking to upgrade to even faster speeds with an indefensible $200 upgrade fee.

Rationing Your Internet Experience?

“The fixation with video means the telecom industry is concentrating too much on limiting user traffic,” Odlyzko writes. “In many ways, the danger for the industry, especially in the wireline arena, is from too little traffic, not too much. The many debates as to whether users really need 100Mbps connections, much less 1Gbps ones, reveal lack of appreciation that burst capability is the main function of modern telecom, serving human impatience. Although pre-recorded video dominates in the volume of traffic, the future of the Net is likely to be bursts of traffic coming from cascades of interactions between computers reacting to human demands.”

Burstein agrees.

“The problem for most large carriers is that they can’t sell the capacity they have, not that they can’t keep up,” he writes. “The current surge in 5G millimeter wave [talk] is not because the technology will be required to meet demand. Rather, it is inspired by costs coming down so fast the 5G networks will be a cheaper way to deliver the bits. In addition, Verizon sees a large opportunity to replace cable and other landlines.”

On the subject of cost and broadband economics, Burstein sees almost nothing to justify broadband rate hikes or traffic management measures like usage caps or speed throttling.

“Bandwidth cost per month per subscriber will continue flat to down,” Burstein notes. “For large carriers, that’s been about $1/month [per customer] since ~2003. Moore’s Law has been reducing equipment costs at a similar rate.”

“Cisco notes people are watching more TV over the net in evening prime time, so demand in those hours is going up somewhat faster than the daily average,” he adds. “This could be costly – networks have to be sized for highest demand – but is somewhat offset by the growth of content delivery networks (CDN), like Akamai and Netflix. (Google, YouTube, and increasingly Microsoft and Facebook have built their own.) CDNs eliminate the carrier cost of transit and backhaul. They deliver the bits to the appropriate segment of the carrier network, reducing network costs.”

Both experts agree there is no evidence of any internet traffic jams and routine upgrades as a normal course of doing business remain appropriate, and do not justify some of the price and policy changes wired and wireless providers are seeking.

But Wall Street doesn’t agree and analysts like New Street Research’s Jonathan Chaplin believe broadband prices should rise because with a lack of competition, nothing stops cable companies from collecting more money from subscribers. He isn’t concerned with network traffic growth, just revenue growth.

“As the primary source of value to households shifts increasingly from pay-TV to broadband, we would expect the cable companies to reflect more of the annual rate increases they push through on their bundles to be reflected in broadband than in the past,” Chaplin wrote investors. Comcast apparently was listening, because Chaplin noticed it priced standalone broadband at a premium $85 for its flagship product, which is $20 more than Comcast’s non-promotional rate for customers choosing a TV-internet bundle.

“Our analysis suggests that broadband as a product is underpriced,” Chaplin wrote. “Our work suggests that cable companies have room to take up broadband pricing significantly and we believe regulators should not oppose the re-pricing. The companies will undoubtedly have to take pay-TV pricing down to help ‘fund’ the price increase for broadband, but this is a good thing for the business. Post re-pricing, [online video] competition would cease to be a threat and the companies would grow revenue and free cash flow at a far faster rate than they would otherwise.”

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  • George: It's a good thing Charter was allowed to buy up Time Warner, or else we'd still have $15/mo cable internet service packages available... If you're no...
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