Phillip Dampier

It is no secret that there is an urban-rural broadband divide.

The market-driven, private enterprise broadband landscape delivers the best speeds and service to urban-suburban areas, particularly those in and around large cities, short-changing rural communities.

This is true regardless of the technology: the fastest fiber optic services are delivered in large population centers, and wireless speeds are fastest there as well. But as the National Telecommunications and Information Administration has discovered, the further away you get from these urban sectors, the poorer the service you are likely to get.

The NTIA’s findings present a significant challenge to phone company claims that rural customers would be better served with wireless broadband instead of spending money to support and upgrade landline infrastructure, which supports DSL and is upgradable to fiber optics.

The NTIA finds these rural wireless networks to be severely lacking:

Not only are far fewer rural residents than urban residents able to access 4G wireless services (i.e., at least 6Mbps downstream), but a further divide also exists within rural communities. For wireless download services greater than 6Mbps, Very Rural communities have approximately half the availability rate of Small Towns, and Small Towns have about half the availability rate of Exurbs (10, 18, and 36 percent, respectively).

This represents nothing new. AT&T and Verizon have shortchanged their rural customers with catastrophically slow DSL service (or none at all) for years:

For wireline download service, Very Rural communities also have the least availability of all five areas. Though a rural/urban split continues to be useful in providing generalized information about availability, a five-way classification uncovers a more refined picture of the divide in broadband availability across the nation. For example, at wireline download speeds of 50Mbps, broadband availability varies from 14 percent (Very Rural), 32 percent (Exurban), 35 percent (Small Town), 62 percent (Central City), to 67 percent (Suburban), even though the overall broadband availability was 63 percent in urban areas compared to 23 percent in rural areas. In addition, wireline and wireless broadband availability, particularly at faster speeds, tends to be higher within Central Cities and the Suburbs compared to everywhere else.

Why the disparity? It is a simple case of economics. Wealthy suburbs can afford the ultimate triple play packages, so providers prioritize the best service for these areas, even above less costly to serve urban centers. Rural residents either get no service at all or only basic slow speed DSL. The Return on Investment to improve broadband is inadequate for these companies in rural areas.

Source: NTIA

The same is true with wireless 4G service. Rural areas struggle for access or endure poor reception because fewer towers provide service away from major highways or town centers.

The NTIA observed wireless download speeds of 6Mbps or more were available to 90% of urban residents, but only 18% of small town residents. Wireless upload speeds of 3Mbps or greater were found in only 14% of small towns.

Dee Davis, president, Center for Rural Strategies, based in Whitesburg, Va. said the implications were clear.

“The market’s always going to go to the well-heeled communities,” Davis observed. “It’s going to go to the densest population.”

Folks in rural communities end up paying more for a lower level of service, Davis said.

“That also means that they don’t get the same chance to participate in the economy,” Davis added. “They don’t get to bring their goods and services to market in the same way. They don’t always get to participate.”

The economics of cutting off rural landlines delivers most of the benefits to providers, and assures decades of inferior service to consumers.

Economic market tests, including Return on Investment, that impact rural broadband availability will not disappear if AT&T and Verizon abandon their rural landline networks. While cost savings will be realized once rural wired infrastructure is decommissioned, there is no free market formula that would encourage either provider to pour investment funds into rural service areas. For the same reasons rural customers are broadband-challenged today, their comparatively smaller numbers and economic abilities will continue to fail investment metrics for innovative new services tomorrow.

The primary reason broadband speeds are lower in rural areas is inferior network infrastructure. Providers argue it does not make economic sense to invest in network upgrades to boost speeds for such a small number of customers. While wireless technology can be cheaper to deploy than the upkeep of a deteriorating landline network, it is not cheap or robust enough to deliver comparable broadband speeds now available in urban areas, especially as broadband usage continues to grow.

Verizon’s chief financial officer Fran Shammo admitted as much during remarks at the at JPMorgan Global Technology, Media and Telecom Conference in May:

If you recall, way back I guess about two years ago we did a trial with DirecTV in Erie, Pa., where we did broadband on the side of a house and offered a triple-play, if you will, which consisted of broadband, voice, and linear TV provided by DirecTV.

What we found was people were adoptive to the broadband; but because of the consumption of broadband through that LTE network, it was really detrimental to the spectrum and to the network performance. Because they used so much data, it soaked up so much of the spectrum.

So what we felt was LTE for broadband works in certain rural areas, but you can’t compete LTE broadband in those dense populated areas because you can’t — first of all, you can’t match the speed with a 50-megabit or a 100-megabit delivery between cable and FiOS and U-verse. And you literally don’t have enough spectrum to be able to use that much consumption.

So what we felt was by partnering with the cable companies, and delivering our LTE network with voice and data, and having that hardwired connection into the home was a better financial way to do it than trying to go LTE broadband. Because we just didn’t see where the spectrum could hold up to the volume that would be demanded.

Without rural cable companies to partner with, Verizon’s decision to move rural broadband to wireless guarantees rural Americans will not benefit from ongoing speed and capacity upgrades that are necessary to support the evolving Internet.

Cable companies, including Time Warner Cable, are offering a mix of threats and financial incentives to keep popular cable programming away from online video competitors.

Bloomberg News today reported the private discussions primarily target upstart streaming video services from companies like Intel, Apple, and Google, which are all proposing multichannel streaming video services that could one day replace the local cable company.

All three would-be competitors have been stymied, some for years, from signing contracts with popular cable networks like HBO, USA, ESPN and Comedy Central. If a viewer wants to watch those networks, they usually have to authenticate themselves as existing cable, satellite, or telco-TV customers to get access to live and recorded programming. The cable industry prefers it that way as a customer retention tool.

Time Warner Cable CEO Glenn Britt admitted to Wall Street analysts attending this week’s Cable Show his company probably insists on contract language that bars programmers from providing content to online video services.

“We may well have ones that have that prohibition,” Britt said at the conference in Washington. “This is not a cookie-cutter kind of business.”

Some cable company contracts are more benign, only requiring programmers to license content on the same terms offered to their online competitors. Britt said some of Time Warner Cable’s contracts fall into this category.

Britt

Britt has repeatedly emphasized Time Warner wants to license content more broadly to allow the company to include it in its TV Everywhere platform, which streams video content to wireless devices. The cable operator adopted a policy in 2009 that sought to deliver content to customers on any device they wish. Restrictive contracts have kept that policy from being fully implemented.

AT&T U-verse says it won’t pay full price for cable programming sold to its online competitors.

“If they’re going to go over-the-top, then that’s a very different conversation and a very different value for our customers,” Jeff Weber, president of content, said last month at an investor conference. “Exclusive versus non-exclusive has materially different value for our customers. And I think we would want that reflected.”

Restrictive contracts are all about protecting the existing pay television ecosystem, according to Charter’s chief financial officer, Chris Winfrey.

“It’s in everybody’s mutual interest that we are protecting the ecosystem in a way that continues to keep the value of that programming that we have and the way it’s delivered to our subscribers today,” Winfrey said added.

Consumer groups say restrictive contracts are the epitome of anticompetitive industry behavior that should be examined by the Justice Department.

“Is it anticompetitive generally? Of course it is, they are keeping programming from their competitors,” said Gigi Sohn from Public Knowledge.

Satellite companies were originally in this same position, unable to carry popular cable networks on reasonable terms at fair prices until the 1992 Cable Act mandated reforms that required non-discriminatory access to cable programming. Online video providers have not yet been able to demand the same terms for their competing services.

AT&T has once again followed Verizon Wireless’ lead by ending early upgrades for contract customers, making it impossible to upgrade a handset with a full device subsidy until 24 months have passed.

The changes took effect last Sunday. Customers that bought their current device after March 1, 2012 must now wait four more months before they can get a discounted upgrade. AT&T also will only allow upgrades within the same “device category,” meaning a customer with an expiring smartphone contract cannot use their upgrade discount on a tablet device.

Previously, both Verizon and AT&T offered customers loyalty discounts and early upgrades for customers not minding a two-year contract extension. Device subsidies — discounts extended to customers to cut prices on new smartphones or tablets, are anathema to many Wall Street analysts because they can drag down provider earnings. Cell companies quietly win back the subsidy discount within two years by charging artificially higher rates on service plans. But Wall Street does not like waiting for a two-year payback.

Verizon Wireless and AT&T both charge nearly the same rates and have almost identical policies and discounts. When one carrier raises prices, the other quickly follows. In the past three years, both companies have ended a number of discounts and plan features — notably loyalty upgrade credits and flat rate data plans — in moves to cut costs and increase profitability.

Both Verizon and AT&T have spoken positively about the idea of doing away with phone upgrade subsidies altogether, but neither would say current rates would be lowered in tandem with such a move. Wall Street wants carriers to consider maintaining current pricing and ending phone subsidies, which would dramatically stimulate company earnings. A device subsidy on a top of the line smartphone is worth $150 a year — money that would come from the customer’s pocket, not AT&T or Verizon.

Customers who don’t want to pay AT&T’s contract prices will not find a better deal from its prepaid division. AT&T has also announced it is discontinuing several  affordable data plan options effective June 20.

The most-affected plan is AT&T GoPhone’s $25 monthly plan, which includes unlimited texting and 250 minutes of calling. That plan allowed customers to choose between three data packages:

• 50MB for $5/month;
• 200MB for $15/month;
• 1GB for $25/month.

Effective June 20, the only available data add-on for this plan will be the 50MB option. Customers exceeding this will have to re-subscribe for an extra $5 for each renewal.

AT&T’s $50 monthly plan includes unlimited texting and calling. But customers will no longer be able to add data service. Instead, they will have to upgrade to AT&T’s premiere $65 plan, which includes the same features as the $50 plan but adds up to 1GB of data.

AT&T says it will have new options for consumers in the coming weeks, but until then, data customers will often pay an average of at least $15 more per month as the changes take effect.

We know what you are watching.

AT&T’s efforts to expand its U-verse platform to more communities is all about improving AT&T’s growing revenues in the broadband business and further monetizing customers’ broadband usage.

Those are the views of Jeff Weber, AT&T’s president of content and advertising sales. Appearing at last week’s Nomura Global Media Summit Conference, Weber also admitted AT&T is using viewer data collected from U-verse TV set-top boxes to help decide what networks to carry and which can be dropped because of lack of viewership.

Weber appeared at the conference to talk about the implications of Project Velocity IP — AT&T’s investment in expanding its U-verse platform and its proposal to transition rural landline customers to AT&T’s wireless service.

AT&T claims when the project is complete, two-thirds of its landline customers will have access to U-verse, and 99 percent of AT&T’s wireline service areas will be covered by AT&T’s mobile network.

Weber’s job primarily focuses on AT&T’s U-verse TV service — dealing with all the networks on the lineup and selling advertising time.

Although television programming is an important revenue generator for AT&T, broadband revenue is the real focus behind AT&T’s U-verse expansion.

“At the core, it is about improving the fundamental broadband business, extending our footprints to be able to cover more of our customers,” Weber said. “Because our core belief is that the broadband business is [going to be] a very good business for a long time.”

Weber

One way AT&T can further increase revenue is to limit broadband usage and charge overlimit fees for customers who exceed their monthly allowance. AT&T currently limits DSL customers to 150GB of usage per month, 250GB for U-verse broadband. The overlimit fee is $10 for each additional 50GB of usage. At present, both the usage limits and overlimit fees are not broadly enforced in many areas.

“I think very clearly incremental broadband usage is going to drive incremental revenue,” explained Weber. “Part of that assumption is that as traffic continues to grow, you need to be able to monetize that traffic in some way, shape or form. At the end of the day, it’s a pretty efficient market and a really efficient way for customers to pay. In almost every other way the more you use, the more you pay. And I don’t think that’s a radical notion and I suspect that’s a kind of thing we’ll see.”

AT&T already earns $170 a month in average revenue per U-verse customer, mostly from package sales of telephone, broadband, and television service.

Television programming content continues to be a major and growing expense for AT&T, eating into profits. Weber complained programming costs are “too high” and limit AT&T from asking subscribers to pay more when rate increases are contemplated.

Instead, AT&T is increasingly playing hardball with programmers, refusing to pay growing programming costs for certain networks and dropping others that do not have many viewers.

How does AT&T know what channels its customers are watching? The company tracks viewing habits with U-verse TV set-top boxes, which automatically report back to AT&T what channels and programs customers are watching.

“Everybody is facing [profit] margin pressure as content costs go up but the question is how will customers react to higher prices as content costs go up,” Weber said. “Everybody is having to make tough decisions and we’ve been able to use that data and make very smart decisions for our customers.”

As an example, Weber noted AT&T uses real viewer numbers during contract negotiations, suggesting that lower-rated networks deserve a lower rate. If a programmer refuses, AT&T can successfully drop a little-watched network without significant customer backlash.

Weber said the numbers are even more valuable when negotiating carriage fees for expensive regional sports networks. Weber said in one city, AT&T decided to not carry a regional network because it found the majority of customers never watched many of the sports teams featured.

Comcast’s Sportsnet for Houston is not available to some U-verse subscribers because AT&T determined the audience for the sports teams on the network was too small.

“We looked at how many of our customers watched zero of those games, one, two, all the way through 150 games for baseball and 80 games for the basketball team that we’re talking about,” Weber said, noting that if a particular viewer watched 30 or more games, AT&T considered that customer a passionate viewer likely to cancel service if the channel was dropped from the lineup.

“It was very clear the viewership intensity in that particular market was low and we didn’t need to pay the rates that were being asked and we’re not,” Weber said, calling the tracking a “perfect insight” into programming costs vs. viewership value.

AT&T also made it clear if programmers went around the company to sell channels direct to consumers over the Internet, AT&T would bring significant pressure for a wholesale rate cut, which some programmers might see as a deterrent to offering online viewing alternatives.

“If they’re going to [stream their programming online], then that’s a very different conversation and a very different value for our customer,” Weber said. “That’s a choice the content providers can make. We’re totally OK with that, but exclusivity versus non-exclusivity has materially different value for our customers, and I think we would want that reflected,” he added.

Monitoring customer viewing habits also helps AT&T earn more revenue by selling targeted commercial messages to specific viewing audiences.

“If an advertiser wanted to buy The Ellen DeGeneres Show, we know based on our data who that audience is,” Weber said. “We can go find that same audience outside of Ellen and maybe extend reach or drive [the ad] price a bit [higher]. We can also go find that same audience online or on your mobile phone.”

Verizon Wireless: You are being watched.

Would it bother you if the advertiser on that big billboard you just drove past could find out if you later visited that business in response? Should a store like Best Buy or Sears be able to know if you are only using their showrooms to see a product you will eventually buy online? Should your phone company be able to store your complete travel history for years and then create new products and services to pitch aggregated travel observations to anyone willing to pay?

Verizon Wireless does not think you will have a problem with any of this, because it has quietly begun selling this information through its Precision Market Insights (PMI) service.

AT&T is likely not too far behind with a similar service of its own, potentially earning millions from a comprehensive data trove tracking customer locations, travel history, and web browsing habits for an undetermined length of time.

The Wall Street Journal reports shareholder demand for higher profits is pushing cell phone companies to find new revenue streams, even at the potential risk of alienating customers and privacy advocates.

PMI clients may find out more about you than you realize, even though phone companies promise they will not sell personally identifiable information about their customers.

The Phoenix Suns are PMI clients, and by tracking game attendees, Verizon Wireless was able to tell the sports team:

• 22% of game attendees are from out-of-town;
• Most spectators had children at home, ranged in age from 25-54 and earned more than $50,000 a year;
• 13% of baseball spring training attendees in the Phoenix area also went to Suns games;
• Area fast food restaurants running Suns promotions saw an 8.4% uptick in business from Verizon Wireless customers.

Such information can let the sports team target advertisers and offer evidence-based statistics that any campaign will increase sales, and by how much. Malls can use PMI to find certain types of customers that have a history of lingering in mall stores. Billboard owners can see if their ad messages resulted in higher in-store visits.

Customers using a phone under a commercial or government account are exempt from the tracking program. All residential customers are automatically opted in to take part, unless they specifically opt out.

Privacy advocates are concerned carriers are storing personal customer usage data for an undetermined amount of time, and in a form that could be personally identifiable, even if the provider decides not to sell data with that granularity to third parties. That could make cell phone companies prime targets for government/law enforcement subpoenas.

Last year, Verizon sent a notice to customers opting them in to the program unless they specifically opted out. Stop the Cap! covered the story back then, helping customers wishing to opt out.

[flv width=”504″ height=”300″]http://www.phillipdampier.com/video/WSJ Cell Companies Track Customers 5-22-13.flv[/flv]

The Wall Street Journal reports wireless carriers were at first slow to sell data on their customers’ usage habits, but not anymore. Shareholders want new sources of revenue, and wireless companies are packaging and selling customer information to get it.  (2 minutes)