Moffett

Wall Street is worried the cable industry will not be able to report major subscriber gains going forward because just about every middle/upper-income customer that wants broadband within cable’s footprint already has the service from either the phone or cable company.

Cable analyst Craig Moffett from MoffettNathanson Research predicts singing up the last 20% of Americans who don’t subscribe to broadband service will be challenging. As of today, 73% have the service, up 2.5% from last year. An increasingly anemic growth rate is a sign the marketplace is getting saturated, with only low-income Americans underrepresented, primarily because they can’t afford the asking price. Most of the rest don’t own or want computers or Internet access or live in a rural area where the service is unavailable.

Under these circumstances, it is no surprise broadband providers are reporting lower new customer gains. Time Warner Cable and Cablevision actually lost broadband customers in the third quarter, mostly to Verizon FiOS. For the last five years, the cable industry has picked up most of its broadband customers from phone companies offering only DSL service.

“To be sure cable is still taking share [from telco DSL] but it is doing so at a much more modest pace,” Moffett said.

The industry’s best chance for new subscriber growth appears to be bundling computers or tablets with an entry-level broadband offering targeting the poor.

Although cable companies are not supplying free PCs just yet, many are introducing relatively slow, budget-priced broadband tiers to attract lower-income subscribers.

Time Warner Cable introduced a $14.95 2/1Mbps broadband tier this month the company hopes will attract price-sensitive customers, especially those now subscribed to low-speed DSL.

Comcast has Internet Essentials, a $10 slow speed broadband service for families with children enrolled in the federal student lunch program. It is also rolling out a “prepaid Internet service” directly targeting low-income customers. Prepaid customers pay $69.95 for an activation kit containing a DOCSIS 3 modem and a month of broadband service. Renewals are priced at $15 for a week or $45 for a month for 3Mbps service with a 768kbps upload rate.

Most other cable providers offer entry-level broadband speeds, but usually only as a retention tool. Even if the industry custom-targets low-speed tiers to low-income homes, many customers may never make it past the cable industry’s credit check procedure. Comcast’s prepaid offering avoids that problem.

Behind the 8 ball.

Intel’s plan to launch a competing virtual cable television operation delivering programming over existing broadband connections is dead and the cable industry has tentative plans to bury the technology overseas.

OnCue was to feature dozens of popular cable networks and a large library of on-demand content using hardware that combined live, on-demand, and streaming video. The service was supposed to be up and running this year, but despite months of talks, Intel was unable to announce any significant carriage agreements with major cable networks. Cable programmers were reportedly fearful of alienating their biggest customers — large incumbent cable, telco and satellite companies — potentially leaving networks exposed to retaliation during contract renewal talks.

The cable industry has repeatedly warned that reselling programming to streaming providers dilutes the value of those networks. The clear implication: sell to our competitors and we will demand significantly discounted rates when our contracts come up for renewal.

Intel has reportedly been shopping the remnants of the service to new buyers. A late October rumor that Verizon Communications was a likely buyer has gone unconfirmed. Today, Bloomberg News reports Dr. John Malone’s Liberty Media has shown an interest (since denied by Liberty) in acquiring the service. Other media accounts suggest Verizon and Liberty could jointly buy the service, but Malone is loyal to the cable industry and is reportedly uncomfortable doing business with a telephone company.

Should Liberty Media acquire the technology, cable companies in the United States can stop worrying about OnCue as an online competitor. Liberty Media would only deploy the technology as an advanced set-top box offered through its owned and operated European cable systems.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Bloomberg Is Intel Abandoning Web-TV Project 10-30-13.flv[/flv]

Bloomberg senior West Coast correspondent Jon Erlichman reports that Intel may be turning over its web-TV project to Verizon and looks at possible reasons why the company may be abandoning the project and what it could mean for Verizon. He speaks on Bloomberg Television’s “Bloomberg West.” (2:28)

The next name of Time Warner Cable?

Charter Communications is laying the foundation for a leveraged buyout of Time Warner Cable before the end of the year in a deal that could leave Time Warner Cable’s broadband customers with Charter’s usage caps.

Reuters reported discussions between the two companies grew more serious after last week’s revelation a poor third quarter left TWC with 308,000 fewer subscribers.

Charter is relying on guidance from Goldman Sachs to structure a financing deal likely to leave Charter in considerable debt. Charter Communications emerged from bankruptcy in 2009 and is the country’s tenth largest cable operator, estimated to be worth about $13 billion. Time Warner Cable is the second largest cable operator and is worth more than $34 billion.

The disparity between the two companies has kept Time Warner Cable resistant to a deal with Charter, stating it would not be beneficial to shareholders. Charter executives hope to eventually win shareholder support for a buyout stressing the significant cost savings possible from a combined operation, particularly for cable programming.

The deal would likely end Time Warner Cable as a brand and leave Charter Communications CEO Thomas Rutledge in charge of a much larger cable company. Pricing and packaging decisions are usually made by the buyer, which could bring faster broadband speeds to Time Warner customers, but also usage caps already in place at Charter.

John Malone’s War on Customers

Malone

Cable billionaire John Malone, former CEO of Tele-Communications, Inc. (TCI) — America’s largest cable operator in the 1980s — believes consolidation is critical to the future of a cable business facing competition from phone companies and cord cutting. Malone’s Liberty Media, which now holds a 25% stake in Charter, is currently buying and consolidating cable operators in Europe. Malone’s post-consolidation vision calls for only two or three cable operators in the United States.

Malone’s quest for consolidation is nothing new.

Under his leadership, TCI eventually became the country’s biggest cable operator, but one often accused of poor service and high prices. More than a decade of complaints from customers eventually attracted the attention of the U.S. Congress, which sought to rein in the industry with the 1992 Cable Act — legislation that lightly regulated rental fees for equipment and the price of the company’s most-basic television tier.

Despite the fact consumer advocates didn’t win stronger consumer protection regulations, TCI was still incensed it faced a new regulatory environment that left its hands tied. One executive at a TCI subsidiary advocated retaliation with broad rate increases for unregulated services to make up any losses from mandated rate cuts.

A 1993 internal TCI memo obtained by the Washington Post instructed TCI system managers and division vice presidents to increase prices charged for customer service calls and add new fees for common installation services the company used to offer for free. TCI’s Barry Marshall recommended charging for as many “transaction” services as possible — like hooking up VCR’s, running cable wire, and programming remote controls for confused customers.

“We have to have discipline,” Marshall wrote. “We cannot be dissuaded from the [new] charges simply because customers object. It will take awhile, but they’ll get used to it. The best news of all is we can blame it on re-regulation and the government now. Let’s take advantage of it!”

Tele-Communications, Inc. (TCI) was the nation’s largest cable operator. Later known as AT&T Cable, the company was eventually sold to Comcast.

The FCC’s interim chairman at the time — James Quello, charged with monitoring the cable industry, was not amused.

“It typifies the attitude of cable companies engaging in creative pricing and rate increases to evade the intent of Congress and the FCC,” Quello said. “There is little doubt that the cable industry has an economic stake in discrediting the congressional act they vehemently and unsuccessfully opposed.”

Marshall defended his internal memo, although admitted it was inartfully written and was not intended for the public. Revelation of a damaging memo like this would normally lead to a quiet resignation by the offending author, but not at John Malone’s TCI, a company with a reputation for being difficult.

Mark Robichaux’s 2005 book, Cable Cowboy: John Malone and the Rise of the Modern Cable Business, was even less charitable.

Robichaux describes Malone as a “complicated hero,” at least for investors for whom he was willing to ignore banking rules and creatively interpret tax law. Robichaux wrote Malone’s idea of customer service was to ‘charge as much as you can, but spend as little as you can get away with.’

TCI’s top priority was to keep up the cable business as an “insular cartel.” The predictable result included accusations of “shoddy service” customers were forced to take or leave. In the handful of markets where TCI faced another cable competitor, TCI ruthlessly slashed prices to levels some would describe as “predatory,” only to rescind them the moment the competitor was gone. TCI’s intolerance for competition usually meant mounting pressure on competitors to sell their system to TCI (sometimes at an astronomical price) or face a certain slow death from unsustainable price cuts.

Among Malone’s most-trusted friends: junk bond financier Michael Milken and Leo Hindery, former CEO of Global Crossing.

Congressman Albert Gore, Jr., later vice-president during the Clinton Administration, was probably Malone’s fiercest critic in Washington. Gore’s office was swamped with complaints from his Tennessee constituents upset over TCI’s constant rate increases and anti-competitive behavior.

The cable industry’s biggest competitor in the 1980s-1990s was a TVRO 6-12 foot diameter home satellite system.

Gore was especially unhappy that TCI’s grip extended even to its biggest competitor — satellite television.

In the 1980s and early 1990s, cable operators made life increasingly difficult for home satellite dish owners, many in rural areas unserved by cable television. But things were worse for home dish owners that walked away from TCI and began watching satellite television instead. To protect against cord-cutting, the cable industry demanded encryption of all basic and premium cable channels delivered via satellite. It was not hard to convince programmers to scramble — most cable networks in the 1980s were part-owned by the cable industry itself.

To make matters worse, unlike cable systems that only leased set-top boxes to customers, home dish owners had to buy combination receiver-descrambler equipment outright, starting at $500. Just a few years later, the industry pressured programmers to switch to a slightly different encryption system — one that required home dish owners replace their expensive set-top box with a different decoder module available only for sale.

Gore was further incensed to learn TCI often insisted home dish owners living within a TCI service area buy their satellite-delivered programming direct from the cable company. Customers hoping to leave cable for good found themselves still being billed by TCI.

Sometimes the rhetoric against TCI and Malone got personal.

”He called me Darth Vader and the leader of the cable Cosa Nostra,” Malone said of Gore. “You can’t win a pissing contest with a skunk, so there’s no point in getting involved in that kind of rhetoric.”

“There’s a joke going around Washington,” John Tinker, a New York-based Morgan Stanley & Company investment banker who specializes in cable television said of Malone back in 1990. “If you have a gun with two bullets, and you have Abu Nidal, Saddam Hussein and John Malone in a room, who would you shoot? The answer is John Malone — twice, to make sure he’s dead.”

TCI itself was a four letter word in the many small communities that endured the cable company’s insufferable service, outdated equipment, and constant rate “adjustments.”

The New York Times reported John Malone’s TCI had a reputation for treating customers with “utter disdain,” and provided examples:

• In 1973, rate negotiations stalled with local regulators in Vail, Colo., the local TCI system shut off all programming for a weekend and ran nothing but the names and home phone numbers of the mayor and city manager. The harried local government gave in.
• In 1981, TCI withheld fees and vowed to go completely dark in Jefferson City, Mo., if the city failed to renew its franchise, while a TCI employee — “who turned out to have a psychological problem,” said Malone — threatened harm to the city’s media consultant. Again, a beleaguered local government renewed the franchise — although in a subsequent lawsuit, TCI was fined $10.8 million in actual damages and $25 million in punitive damages.
• In 1983, the small city of Kearney, Neb., also dissatisfied with poor service and rising rates, tried to give Malone some competition in the form of a rival system built by the regional telephone company. TCI slashed fees and added channels until the enemy was driven from the field.

“That’s the dark side, if you will, of TCI,” said Richard J. MacDonald, a media analyst with New York-based MacDonald Grippo Riely.

By mid-1989, Malone’s frenzied effort to consolidate the cable industry resulted in him presiding over 482 merger/buyout deals, on average one every two weeks. Among the legacy cable companies that no longer existed after TCI’s takeover crew arrived: Heritage Communications, United Artists Communications and Storer Communications.

To cover the debt-laden deals, Malone simply raised cable rates and shopped for easy credit. Bidding with others’ money, the per-subscriber price of cable systems shot up from $998 in 1983 to an astronomical $2,328 in 1989.

The General Accounting Office, the investigative arm of Congress, found deregulating the cable industry cost customers through rate hikes averaging 43 percent. In Denver, TCI raised rates more than 70% between 1986 and 1989.

Malone’s attempt to finance a leveraged, debt-heavy buyout of Time Warner Cable seems to show his business philosophy has not changed much.

More drive-by reporting on Comcast’s usage caps.

When the media covers Internet Overcharging schemes like usage caps and consumption billing, it is often much easier to take the provider’s word for it instead of actually investigating whether subscribers actually need their Internet usage limited.

Comcast’s planned reintroduction of its usage caps on South Carolina customers begins Friday. Instead of the now-retired 250GB limit, Comcast is graciously throwing another 50GB of usage allowance to customers, five years after defining 250GB as more than generous.

The Post & Courier never bothered to investigate if Comcast’s new 300GB usage cap was warranted or if Charleston-area customers wanted it. It was so much easier to just print Comcast’s point of view and throw in a quote or two from an industry analyst.

In fact, the reporter even tried to suggest the Internet Overcharging scheme was an improvement for customers.

The newspaper reported Comcast was the first large Internet provider in the region to allow customers to pay even more for broadband service by extending their allowance in 50GB increments at $10 a pop. (Actually, AT&T beat Comcast to the bank on that idea, but has avoided dropping that hammer on customers who already have to be persuaded to switch to AT&T U-verse broadband that tops out at around 24Mbps for most customers.)

Since 2008, the company’s monthly limit has been capped at 250 GB per household. When customers exceeded that threshold, Comcast didn’t have a firm mechanism for bringing them back in line, other than to issue warnings or threaten to cut off service.

“People didn’t like that static cap. They felt that if they wanted to extend their usage, then they should be allowed to do that,” said Charlie Douglas, a senior director with Comcast.

Charleston is the latest in a series of trial markets the cable giant has used to test the new Internet usage policy in the past year. As with any test period, the company can modify or discontinue the plan at any time.

During the trial period in Charleston, customers will get an extra 50 GB of monthly data than they’re used to having. If they exceed 300 GB, they can pay for more.

“300 GB is well beyond what any typical household is ever going to consume in a month,” Douglas said. “In all of the other trial markets with this (limit), it really doesn’t impact the overwhelming super-majority of customers.”

The average Internet user with Comcast service uses about 16 to 18 GB of data per month, Douglas said.

Customers who use less than five GB per month will start seeing a $5 discount on their bills.

“We think this approach is fair because we’re giving consumers who want to use more data a way to do so, and for consumers who use less, they can pay less,” Douglas said.

Data caps are designed to stop content piracy?

The Charleston reporter asserts, without any evidence, “data-capping is a trend many Internet service providers are expected to follow in the next few years as the industry aims to reduce network congestion and to find safeguards against online piracy.”

Suggesting data caps are about piracy immediately rings alarm bells. Comcast and other Internet Service Providers fought long and hard against being held accountable for their customers’ actions. The industry wants nothing to do with monitoring online activities lest the government hold them accountable for not actively stopping criminal activity.

“It’s not about piracy, per se,” said Douglas. “We don’t look at what people are doing. The purpose is really a matter of fairness. If people are using a disproportionate amount of data, then they should pay more.”

Comcast’s concern for fairness and disproportionate behavior does not extend to the rapacious pricing and enormous profit it earns selling broadband, flat rate or not.

MIT Technology Review’s David Talbot found “Time Warner Cable and Comcast are already making a 97 percent margin on their ‘almost comically profitable’ Internet services.” That figure was repeated by Craig Moffett, one of the most enthusiastic, well-respected cable industry analysts. That percentage refers to “gross margin,” which is effectively gravy on largely paid off cable plant/infrastructure that last saw a major wholesale upgrade in the 1990s to accommodate the advent of digital cable television and the 500-channel universe. Broadband was introduced in the late 1990s as a cheap-to-deploy but highly profitable, unregulated ancillary service.

How things have changed.

Just follow the money….

Customers used to being gouged for cable television are now willing to say goodbye to Comcast’s television package in growing numbers. Today’s must-have service is broadband and Comcast has a high-priced plan for you! But earning up to 97 percent profit from $50+ broadband isn’t enough.

A 300GB limit isn’t designed to control congestion either. In fact, had she investigated that claim, she would have discovered the cable industry itself disavowed that notion earlier this year.

In fact, it’s all about the money.

Michael Powell, the head of the cable industry’s top lobbying group admitted the theory that data caps are designed to control network congestion was wrong.

“Our principal purpose is how to fairly monetize a high fixed cost,” said Powell.

Powell mentioned costs like digging up streets, laying cable and operational expenses. Except the cable industry long ago stopped aggressive buildouts and now maintains a tight Return On Investment formula that keeps cable broadband out of rural areas indefinitely. Operational expenses for broadband have also declined, despite increases in traffic and the number of customers subscribing.

[flv]http://www.phillipdampier.com/video/CNBC Internet v. Cable 8-20-10.flv[/flv]

Don’t take our word for it. Consider the views of Suddenlink Cable CEO Jerry Kent, interviewed in 2010 on CNBC. (8 minutes)

“I think one of the things people don’t realize [relates to] the question of capital intensity and having to keep spending to keep up with capacity,” said Suddenlink CEO Jerry Kent. “Those days are basically over, and you are seeing significant free cash flow generated from the cable operators as our capital expenditures continue to come down.”

Unfortunately, Charleston residents don’t have the benefit of reporting that takes a skeptical view of a company press release and the spokesperson readily willing to underline it.

If Comcast seeks to be the arbiter of ‘fairness,’ then one must ask what concept of fairness allows for a usage cap almost no customers want for a service already grossly overpriced.

Broadband in the United States costs far more than in other countries — nearly three times as much as in the UK and France, and at least five times more than South Korea, according to BBC News.

The New America Foundation compared hundreds of available packages around the world and found customers in America’s largest cities are getting the biggest bills.

Customers in San Francisco with a discounted low-medium speed bundle including broadband pay $99 a month. A near-equivalent package costs London residents $38. New Yorkers get some savings from Time Warner and Cablevision facing down Verizon FiOS. But it isn’t enough. In the Big Apple, a promotional bundle averages $70 a month. “C’est la vie,” say Parisians. They only pay $35 for about the same. Even Washington, D.C. residents, which include the country’s most powerful politicians, pay Comcast its $68 asking price. In Seoul, South Korea, a comparable offer costs $15 a month.

High asking prices don’t buy better service. According to a report by the OECD issued over the summer, the United States ranks among the worst in terms of broadband-only pricing. With an average price of $90 a month for 45Mbps service, the U.S. ranked 30th out of 33 countries. Add phone and television service and the price spikes to around $200.

The BBC pondered why there is such a disparity in pricing. The answer was easy to spot: the lack of true competition.

“Americans pay so much because they don’t have a choice,” said Susan Crawford, a former special assistant to President Barack Obama on science, technology and innovation policy. “We deregulated high-speed Internet access 10 years ago and since then we’ve seen enormous consolidation and monopolies, so left to their own devices, companies that supply Internet access will charge high prices, because they face neither competition nor oversight.”

Although Americans can name the largest and deep pocketed providers — Comcast, AT&T, Time Warner Cable, Verizon, Cablevision, CenturyLink, Cox, and Frontier — most cannot choose from more than one cable provider and one telephone company. Comcast does not compete against Time Warner and AT&T does not compete against Verizon, except in the wireless world where both companies offer near-identical plans and pricing.

Comcast is quite the gouger in San Francisco.

Bay area customers told the BBC they get bills ranging from $120 a month for television and broadband (not including a $7 modem rental fee) to $200 a month for phone, TV, and Internet access. That same cable company is now testing a 300GB monthly usage cap on broadband in several American cities.

In contrast South Korea offers ubiquitous free Wi-Fi letting customers avoid usage charges. Home broadband is fast and cheap. Most pay $20 a month for 100Mbps.

Digging deeper, the BBC found clues why robust broadband competition delivers savings for consumers in Europe and Asia while Americans pay more.

Rick Karr, who made a PBS documentary in the UK comparing broadband costs at home and abroad, said the critical moment came when the British regulator Ofcom forced British Telecom to open its network and allow other companies to sell broadband over its copper telephone wires. In the United States, regulators never forced cable operators to open their networks, and after a 6-3 Supreme Court decision upheld the cable industry’s insistence it need not share access with competitors, telephone companies quickly called for parity.

A 2005 Supreme Court decision upheld the cable industry’s right to keep competitors off its cable broadband network.

Some argue the ruling promotes more competition by provoking competitors to build their own networks. But current conventional wisdom among the investment community teaches one cable and one phone company is considered good enough. Additional providers would erode the standing of all and force price cutting to compete.

There are exceptions. Although Google’s fiber to the home service has drawn national attention for its inexpensive gigabit fiber broadband network ($70 for broadband-only service), at least 150 cities are served by the public sector — co-op or publicly owned utility companies that offer broadband, often delivered over fiber optic networks.

Those networks often charge considerably less than the incumbent cable operator or phone company, a fact that has driven many privately run operators to seek legislative bans on community broadband.

In response to the report, telecommunications companies avoided the topic of prices and focused instead on value for money and the future.

Lowell McAdam, CEO of Verizon Communications, said Europe was replete with a decade of underinvestment, leaving many with less than 30Mbps service. The National Cable and Telecommunications Association said it was difficult to make international comparisons on price and Scott Cleland, part of the industry-funded NetCompetition website claimed although people may pay higher bills, they can at least choose among phone, cable, wireless or satellite.

“We may be paying more in your eyes today but we are building for tomorrow and the long-term,” said Cleland.