Phillip “Spending $6k per cable customer is obviously a much better deal than paying half that to build a fiber to the home network” Dampier

Math was never my strong subject, but even I can calculate the groupthink of American cable and telephone companies and their friends on Wall Street just doesn’t add up.

This week, we learned that cable companies like Bright House Networks, Suddenlink, and Charter Communications are already lining up for a chance to acquire three million cable customers Comcast intends to sell if it wins approval of its merger with Time Warner Cable. Wall Street has already predicted Comcast will fetch as much as $18 billion for those customers and pegged the value of each at approximately $6,000.

But for less than half that price any company could build a brand new fiber to the home system capable of delivering 1,000Mbps broadband and state-of-the-art phone and television service and start banking profits long before paying off the debt from buying an inferior coaxial cable system. Yet we are told time and time again that the economics of fiber to the home service simply don’t make any sense and deploying the technology is a waste of money.

Let’s review:

Google Fiber was called a boondoggle by many of its competitors. The folks at Bernstein Research, routinely friendly to the cable business model, seemed appalled at the economics of Google’s fiber project in Kansas City. Bernstein’s Carlos Kirjner and Ram Parameswaran said Google would throw $84 million into the first phase of its fiber network, connecting 149,000 homes at a cost between $500-674 per home. The Wall Street analyst firm warned investors of the costs Google would incur reaching 20 million customers nationwide — $11 billion.

“We remain skeptical that Google will find a scalable and economically feasible model to extend its build out to a large portion of the U.S., as costs would be substantial, regulatory and competitive barriers material, and in the end the effort would have limited impact on the global trajectory of the business,” Bernstein wrote to its investor clients.

So Google spending $11 billion to reach 20 million new homes is business malpractice while spending $18 billion for three million Time Warner Cable customers is confirmation of the cable industry’s robust health and valuation?

Bernstein’s firm never thought highly of Verizon FiOS either.

“If I were an auto dealer and I wanted to give people a Maserati for the price of a Volkswagen, I’d have some seriously happy customers,” Craig Moffett from Bernstein said back in 2008. “My problem would be whether I could earn a decent return doing it.”

Back then, Moffett estimated the average cost to Verizon per FiOS home passed was $3,897, a figure based on wiring up every neighborhood, but not getting every homeowner to buy the service. Costs for fiber have dropped dramatically since 2008. Dave Burstein from DSL Prime reported by the summer of 2012 Verizon told shareholders costs fell below $700/home passed and headed to $600. The total cost of running fiber, installing it in a customer’s home and providing equipment meant Verizon had to spend about $1,500 per customer when all was said and done.

Moffett concluded Verizon was throwing money away spending that much on improving service. He wasn’t impressed by AT&T U-verse either, which only ran fiber into the neighborhood, not to each home. Moffett predicted AT&T was spending $2,200 per home on U-verse back in 2008, although those costs have dropped dramatically as well.

Moffett

Moffett’s solution for both Verizon and AT&T? Do nothing to upgrade, because the price wasn’t worth the amount of revenue returns either company could expect in the short-term.

It was a much different story if Comcast wanted to spend $45 billion to acquire Time Warner Cable however, a deal Moffett called “transformational.”

“What we’re talking about is an industry that is becoming more capital intensive,” Todd Mitchell, an analyst at Brean Capital LLC in New York told Bloomberg News. “What happens to mature, capital-intensive companies — they consolidate. So, yes, I think the cable industry is ripe for consolidation.”

Other investors agreed.

“This is definitely a bet on a positive future for high-speed access, cable and other services in an economic recovery,” said Bill Smead, chief investment officer at Smead Capital Management, whose fund owns Comcast shares.

But Forbes’ Peter Cohan called Google’s much less investment into fiber broadband a colossal waste of money.

“Larry Page should nip this bad idea in the bud,” Cohan wrote.

Cohan warned investors should throw water on the enthusiasm for fiber before serious money got spent.

“FTTH authority, Neal Lachman, wrote in SeekingAlpha, that it would cost as much as $500 billion and could take a decade to connect all the houses and commercial buildings in the U.S. to fiber,” Cohan added.

Cohan was concerned Google’s initial investment would take much too long to be recovered, which apparently is not an issue for buyers willing to spend $18 billion for three million disaffected Time Warner Cable customers desperately seeking alternatives.

An investment for the future, not short term profits.

Municipal broadband providers have often chosen to deploy fiber to the home service because the technology offers plenty of capacity, ongoing maintenance costs are low and the networks can be upgraded at little cost indefinitely. But such broadband efforts, especially when they are owned by local government, represent a threat for cable and phone companies relying on a business model that sells less for more.

The American Legislative Exchange Council (ALEC), funded by Comcast, Time Warner, AT&T, Verizon, and other large telecom companies is at the forefront of helping friendly state legislators ban community fiber networks. Their excuse is that the fiber networks cost too much and, inexplicably, can reduce competition.

“A growing number of municipalities are […] building their own networks and offering broadband services to their citizens,” ALEC writes on its website. “ALEC disagrees with their answer due to the negative impacts it has on free markets and limited government.  In addition, such projects could erode consumer choice by making markets less attractive to competition because of the government’s expanded role as a service provider.”

The Fiber-to-the-Home Council obviously disagrees.

“Believe it or not, there are already more than a thousand telecom network operators and service providers across North America that have upgraded to fiber to the home,” says the Council. “The vast majority of these are local incumbent telephone companies that are looking to transform themselves from voice and DSL providers into 21st century broadband companies that can deliver ultra high-speed Internet and robust video services, as well as be able to deliver other high-bandwidth digital applications and services to homes and businesses in the years ahead.”

Stephenson

In fact, a good many of those efforts are undertaken by member-owned co-ops and municipally owned providers that answer to local residents, not to shareholders looking for quick returns.

The only time large companies like AT&T move towards fiber to the home service is when a competitor threatens to do it themselves. That is precisely what happened in Austin. The day Google announced it was launching fiber service in Austin, AT&T suddenly announced its intention to do the same.

“In Austin we’re deploying fiber very aggressively,” said AT&T CEO Randall Stephenson. “The cost dynamics of deploying fiber have dramatically changed. The interfaces at the homes, the wiring requirements, how you get a wiring drop to a pole, and the way you splice it has totally changed the cost dynamics of deploying fiber.”

Prior to that announcement, AT&T justified its decision not to deploy fiber all the way to the home by saying it was unnecessary and too costly. With Google headed to town, that talking point is no longer operative.

AT&T says it plans to adopt fiber to the home service in cities around the United States as part of an expansion of its U-verse GigaPower service.

CEO Randall Stephenson told investors at the Morgan Stanley Technology, Telecom, and Media Conference the “cost dynamics” of fiber optics have become “really encouraging” in its targeted fiber deployment in Austin, Tex.

“In fact I would tell you we are so encouraged that we want to begin taking this to other communities [where] we can get the terms and conditions like we have in Austin,” Stephenson said, referring to Austin’s red-tape cutting and clearing the way for fiber upgrades with eased permit requirements and pole attachment policies. “We are redirecting investment to fiber to the home deployment, and in fact we are going to launch the service in Dallas this summer.”

Stephenson added that where U-verse faces significant competition from a “new competitor,” AT&T will be “a little more aggressive and assertive in deploying that technology around the country.”

That most likely means AT&T will choose fiber to the home service in areas facing imminent competition from Google Fiber or another similar provider.

Phillip “Another year, another AT&T deregulation measure” Dampier

It’s back.

It seems that nearly every year, AT&T and its well-compensated fan base of state legislators trot out the same old deregulation proposals that would end oversight of basic telephone service and allow AT&T (and other phone companies in Kentucky) to pull the plug on landline service wherever they feel it is no longer profitable to deliver.

This year, it’s Senate Bill 99, introduced once again by Sen. Paul “AT&T Knows Best” Hornback (R-Shelbyville). Back in 2012, Hornback disclosed AT&T largely authors these deregulation measures and he introduces them on AT&T’s behalf. In fact, he’s proud to admit it, telling the press nobody knows better than AT&T what the company needs the legislature to do for it.

“You work with the authorities in any industry to figure out what they need to move that industry forward,” Hornback said. “It’s no conflict.”

While Hornback moves AT&T forward, “his” bill will move rural Kentucky’s best chances for broadband backwards.

AT&T always pulls out all the stops when lobbying for its deregulation bills. In Kentucky, AT&T has more than 30 legislative lobbyists, including a former PSC vice chairwoman and past chairs of the state Democratic and Republican parties working on their behalf. It has spent over $100,000 in state political donations since 2007.

The chief provisions of the bill would:

• End almost all oversight of telephone service by the Public Service Commission anywhere there are more than 15,000 people living within a telephone exchange’s service area;
• Give Kentucky phone companies the right to disconnect urban/suburban basic landline phone service and replace it with either wireless or Voice over IP service;
• Allow rural customers to keep landline service for now, but also permits AT&T and other companies to effectively stop investing in their rural wired networks.

This year, AT&T apparently conceded it was just too tough to convince the legislature to let them disconnect hundreds of thousands of rural Kentucky phone customers at the company’s pleasure, so this time they have permitted rural wired service to continue, with some exceptions that make life easier for AT&T.

First, the end of oversight of telephone service means customers in larger communities in Kentucky will have no recourse if their phone service doesn’t work, is billed incorrectly, is disconnected during a billing dispute, or never installed at all. The PSC has traditionally served as a last resort for customers who do not get satisfaction dealing with the local phone company directly. PSC intervention is taken very seriously by most phone companies, but the state agency will be rendered almost toothless under this bill.

Second, although existing rural phone customers would be able to keep their basic landline service (for now) under this measure, nothing prevents AT&T from marketing alternative wireless phone service to customers experiencing problems with their existing service. Verizon has attempted that in portions of upstate New York, where telephone network deterioration has led to increased complaints. In some cases, Verizon has suggested customers switch to wireless service instead of waiting for phone line repairs which may or may not solve the problem. New rural customers face the possibility of only being offered wireless or alternative phone services.

Third, provisions in the bill give AT&T and other companies wide latitude to offer wireless or Voice over IP alternatives to landline service with little recourse for customers who only later discover these alternatives don’t support faxes, medical or security alarm monitoring, dial-up Internet, credit card processing, etc.

Fourth, the bill eliminates any requirement imposed upon broadband service in existence as of July 15, 2004. In fact, the measure specifically defines both phone and broadband service as “market-based and not subject to state administrative regulation.” That basically means service will be unregulated.

AT&T’s wireless home phone replacement

Here are some real world examples of where S.B. 99 could trip up consumers:

1. An elderly Louisville couple living the summer months in Louisville discover their phone service has been switched to the U-verse platform over the winter as AT&T seeks to decommission its deteriorating landline network in the neighborhood. S.B. 99 offers customers a 30-day opt out provision upon first notification, allowing a customer dissatisfied with the alternative service the right to switch back to their landline. But this couple was in Florida during the 30-day window, did not receive the notification to opt out in time to act, and are now stuck with U-verse. Unfortunately, the home medical monitoring equipment for his pacemaker does not work with Voice over IP phone service. This couple’s recourse: None.
2. A customer moves into a new home currently served by AT&T’s wireless home phone replacement service. The customer doesn’t like the sound quality of the service and wants a traditional landline instead. Her recourse: None.
3. A retired couple uninterested in broadband service or television from AT&T U-verse suddenly discovers AT&T wants to raise prices on landline phone service, but offers savings if the couple agrees to sign up for U-verse. Instead of paying a $25 monthly phone bill, the couple is now being asked, on a fixed income, to pay $100 a month for services they don’t want or need. Their recourse: They can appeal to keep their landline if they meet the aforementioned deadline, but they have no recourse if AT&T raises rates for basic phone service to make its discounted bundled service package seem more attractive.

Hood Harris, president of AT&T Kentucky, follows the same playback AT&T always uses when pushing these bills by framing its argument around landline telephone service regulation, which is an easy sell for cell phone-crazy customers who have not made a landline call in years:

Harris

Some of Kentucky’s laws that regulate our phones were written before cable television, cell phones, the Internet or email existed.

Because of these outdated laws, providers like AT&T must sink resources into outdated technology that could be invested in the modern broadband and wireless technology consumers want and need.

Every dollar invested in old technology is a dollar not being invested in speeding up the build out of new technology across the commonwealth.

It’s no longer the 19th century coming into your home over the old, voice-only phone network that was put in place under now-outdated laws. It’s the 21st century coming into your home over modern networks. While technology has changed dramatically for the better in just the past few years, our laws have not.

Despite what you may have heard, SB 99 will not remove landlines from rural homes or businesses.

Instead, this legislation puts those customers in charge of deciding which communications services they want and need. If you are a rural customer, for example, you may choose to join the nearly 40 percent of Kentuckians who already have moved on from landline home phones and gone only with a wireless phone, or you may choose a landline phone that’s provided over the Internet (known as Voice over Internet Protocol, or VoIP), or you may choose both a VoIP and a wireless service.

But you do not have to — you can keep your existing landline phone if you like. Under SB 99, the choice is yours.

It’s seems like a logical argument, until you read between the lines. Harris implies that those old-fashioned laws governing landlines you don’t have anymore are slowing down AT&T from bringing about a Broadband Renaissance for Kentucky. If AT&T only was freed from the responsibility of patching up its copper wire phone network, it could spend all of its time, money, and attention on improving cell phone service and bring broadband to everyone. Harris promises every resident will have a choice to get the service they want — wireless or wired — as long as you remember he is only talking about basic phone service, not broadband.

If your community isn’t highlighted on this map, AT&T has a wireless-only future in store for you.

Harris avoids disclosing AT&T’s true agenda. The company has freely admitted to shareholders it wants to scrap its rural wired network, now considered too costly to maintain for a diminishing number of customers. Unlike independent phone companies like Frontier, AT&T has been in no hurry to upgrade these rural customers for broadband service. AT&T has not even bothered to apply for federal broadband funding assistance to defray some of the costs of extending DSL to its rural customer base. With no possibility of buying broadband from AT&T, customers have little incentive to keep wired service if a cell phone will do. But decommissioning landline service in rural Kentucky guarantees these customers will probably never receive adequate broadband.

The “long-term cost reduction” AT&T mentions above is for them, not for you.

AT&T claims it will invest the savings in a wireless broadband network for rural customers, but as any smartphone owner will attest, AT&T’s wireless service is much more expensive than traditional phone service and its data plans are stingy and very expensive. Customers who can buy DSL from AT&T pay as little as $14.99 a month for up to 150GB of usage. A wireless data plan with AT&T for a home computer or notebook starts at $50 a month and only provides 5GB of usage before customers face a $10 per gigabyte overlimit fee. Which would you prefer: paying $14.99 for 150GB of usage with AT&T DSL or $1,500 for the same amount of usage on AT&T’s wireless network?

AT&T’s claims it will expand broadband as a result of not having to spend money on its landline network are specious. In fact, regardless of whether Kentucky passes S.B. 99 or not, AT&T has already embarked on its last known U-verse expansion. Project Velocity IP (VIP) devotes $6 billion to expanding U-verse to 57 million homes, reaching 75% of customer locations by the end of 2015. For the remaining 25% of customers, mostly in rural areas, AT&T’s plan isn’t to spend more money on improved wired service. Instead, it will build out its wireless network to serve the remaining customers with its LTE wireless broadband service — the same one that costs you $1,500 a month if you use 150GB.

Wireless is a cash cow for AT&T, so even saddled with its landline network, the company still spends the bulk of its investments on the wireless side of the business. Project VIP could have devoted all its resources to bringing U-verse to a larger customer base, but it won’t. AT&T sees much fatter profits spending $14 billion now to expand its wireless 4G LTE network and collect a lot more money later from its rural Kentucky customers.

Kentucky residents who don’t have U-verse in their area by the end of 2015 are probably never going to get the service, with or without S.B. 99. So why support a measure that delivers all the benefits to AT&T and leaves you sorting through the fine print just to keep the service you have now at a reasonable price. In every other state where AT&T has won deregulation, it raises the rates with no corresponding improvement in service.

Just how bad can AT&T’s wireless home phone replacement be? Just look at their disclaimers:

AT&T Wireless Home Phone is not compatible with home security systems, fax machines, medical alert and monitoring services, credit card machines, IP/PBX Phone systems, or dial-up Internet service. AT&T’s fine print on its website.

“AT&T’s wireless services are not equivalent to wireline Internet.” Wireless Customer Agreement, Section 4.1.

“WE DO NOT GUARANTEE YOU UNINTERRUPTED SERVICE OR COVERAGE. WE CANNOT ASSURE YOU THAT IF YOU PLACE A 911 CALL YOU WILL BE FOUND.” (All caps in original). Section 4.1.

George Washington always knew the value of a dollar, and so does AT&T. It wants more of yours going into their bank account.

The Teaser Before the Sting:

Thank you for choosing AT&T. Throughout the year we’ve worked hard to improve the U-verse experience. For example, you can now enjoy live TV channels on your computer, smartphone or tablet at no extra cost within the U-verse app or at Uverse.com. We’re looking forward to delivering even more value in 2014.

Here it comes:

The monthly price of some U-verse products are increasing and may impact the cost of your services. These changes reflect increased business costs, including costs associated with higher programming fees.

The monthly price for the following U-verse TV service plans will increase $3 beginning with bills received on January 26, 2014: U-family to $62; U200 to $77; U200 Latino to $87; U300 to $92; U300 Latino to $102; U450 to $124; and U450 Latino to $134. (Grandfathered plans also will increase $3: U100 to $64 or $69, depending on when first ordered; and U400 to $119.)

The monthly price of each non-DVR TV receiver will increase from $7 to $8 and the monthly price of the Wi-Fi enabled Residential Gateway will increase from either $2 to $4 or from $6 to $7, depending on when it was first ordered. If you have a package that includes an HD-ready DVR, that will continue to be included with your TV service.

The Broadcast TV Surcharge will be $2.99 per month beginning on February 1, 2014, in all markets except for Flint, MI, Indianapolis, IN, Huntsville, AL, Topeka, KS and Lansing, MI, where it will be $1.99. This charge is to recover a portion of the amount local broadcasters charge AT&T to carry their channels.

For customers with AT&T U-verse High Speed Internet service, the monthly price when not combined with any other qualifying AT&T service (AT&T U-verse IPTV service, AT&T U-verse Voice, combined/unified billed AT&T DIRECTV or AT&T wireless) will increase by $5.00 effective March 1, 2014, as described below. By bundling your internet services with other AT&T U-verse products this price increase will not affect you. AT&T wireless or AT&T DirecTV customers with AT&T U-verse Broadband can avoid this price increase by combining their services onto a single bill. To speak to an AT&T representative, please contact our Complete Customer Care Center at 1-800-288-2020.

The monthly price for Basic will become $33, High Speed Internet Express will become $41, High Speed Internet Pro will become $46, High Speed Internet Elite will become $51, High Speed Internet Max will become $56, High Speed Internet Max Plus will become $61, High Speed Internet Max Turbo will become $71, and High Speed Internet Power will become $81.

If you are on a current U-verse TV, U-verse Voice, and/or U-verse High Speed Internet pricing promotion, the promotional benefit will continue until the applicable promotion ends or expires. For questions regarding any of the U-verse services, visit att.com/uversesupport.

For years, cable operators have denied they have a problem.

But new evidence suggests Americans are cutting back on their cable television habit as prices continue to rise and alternatives become available.

One of the worst affected by cable cord cutters is Time Warner Cable, which has been consistently losing video customers month after month since 2009:

Disputes with programmers and competition from satellite and telephone companies may not be enough to explain away the trend of subscriber losses. It also does not explain why Americans under 35 are increasingly unlikely to sign up for cable television at all.

Cable cord cutting — fact or fiction?

Nonsense, replies Bloomberg opinion columnist Matthew C. Klein:

It is tempting to think that the declining number of subscribers at the U.S.’s biggest cable-television companies is a symptom of the industry’s malaise as it slowly slides into obsolescence. Don’t buy it. The losses are accounted for in the gains by smaller and nimbler rivals.

[…] The customers who have been abandoning Comcast and Time Warner Cable in droves haven’t given up on paid TV content, however. Focusing on the travails of the biggest cable companies obscures the reality that, according to Bloomberg Industries, the total number of pay-TV subscribers is slightly higher now than it was at the end of 2008 and that there were probably more people paying for television subscriptions at the end of 2013 than at the end of 2012.

To the extent that individual company results tell us anything, it could be about where Americans are moving, or the relative quality of service offered by the various companies. In the 12 months ended Dec. 31, AT&T Inc. added 924,000 subscribers to its U-verse TV service, while Verizon Communications Inc. added 536,000 subscribers to its FiOS TV service. Since the end of 2008, the two companies best known for their wireless services have added about 8 million pay-TV subscribers — far more than Time Warner Cable and Comcast have lost.

Klein’s views mirror those of many cable industry executives who blame the economy for deteriorating cable television subscriber numbers. Many suggest multi-generational households are responsible — stay at home kids and older parents are sharing a single cable television subscription. Others claim discretionary income is squeezing some to downgrade, but not cancel, cable television service.

Klein’s accounting does not tell the entire story. Competition from telephone companies, especially AT&T’s U-verse, is not as pervasive against Time Warner Cable and Comcast as Klein suggests. In fact, Charter Communications is among the cable companies facing the biggest onslaught of competition from AT&T. U-verse has picked up many of its newest subscribers not because of a sudden urge to switch, but rather because the service has only just become available in several new markets as a result of AT&T’s expansion effort. Verizon FiOS is still slowly expanding within its current franchise areas as well. Neither Comcast or Time Warner Cable consider either service much of a serious competitive threat.

AT&T U-verse, the larger of the two telephone company services, has a TV penetration rate of just 21 percent of customer locations. FiOS, which serves a smaller customer base, has a 35 percent penetration rate for television. Cable remains dominant for now, even as it loses subscribers and market share.

Another way to measure cord cutting is to look at the subscriber numbers of major basic cable networks that are most likely to be a part of any channel lineup. ESPN, for example, lost around 1.5 million subscribers between September 2011 and September 2013. Most of that loss came from cord cutting or downgrades to tiers like “Broadcast Basic,” consisting mostly of local television stations. ESPN’s numbers include all pay television platforms — satellite, telco TV, and cable.

In spite of the subscriber losses, cable industry profits remain healthy. Revenue growth these days comes from broadband service and rate increases.