Apple TV (version 4)

The cable industry is on the cusp of saving billions of dollars annually buying and maintaining set-top boxes and cable modems if they can convince customers to buy their own instead.

Cable companies collectively spend as much as $10 billion a year on customer premise equipment (CPE), ranging from simple Digital Transport Adapters for older analog-only TV sets, to the most advanced cloud-based set-top boxes and DVRs.

Cable industry analyst Craig Moffett believes the cable industry will save a fortune and lose one as consumers buy their own set-top equipment like Apple TV or Roku boxes and buy their own modems to avoid monthly rental charges. That means cable companies will likely forfeit a considerable percentage of their leasing/rental revenue.

“The idea that customers will eventually consume video through their own Apple TV or Roku boxes, or simply connect their cable to their smart TVs, Xboxes and Sony PlayStations, is neither new nor far-fetched,” wrote Moffett. “There are good reasons to believe that CPE spending may come down significantly in future (product) generations.”

Most cable equipment is leased to customers and often installed by a cable operator that covers the costs of sending a truck to the customer’s home. After installation, the average American cable subscriber pays $89.16 a year renting a single cable box, and for those with multiple boxes and a DVR, those costs rise to $231.82 a year. A cable modem can be purchased for $50-90 on average, and usually pays for itself in less than one year of rental charges charged by many cable operators.

Comcast X1

Even with more capable consumer-targeted set tops like the latest Apple TV ($149-199) and Roku devices now approaching $100, it will not take long for consumers to recoup their money avoiding rental fees.

Cable operators like Time Warner Cable now carry the majority of their cable channels on apps accessible through devices like the Roku. Customers will not get the flashiest on-screen experience, but they do get a welcome alphabetical channel lineup and a reasonably good picture. Future generations of the boxes are expected to enhance usability and picture quality.

Cable operators like Charter stand to gain the most. If their merger with Time Warner Cable and Bright House Networks is approved, all three companies are expected to see reductions in equipment expenses estimated at $2.97 billion in 2015 to as little as $917 million by 2019, according to Moffett. Charter is already expecting to see its capital spending fall more than a billion dollars a year, from $6.97 billion to $5.83 billion by 2019, but consumers should not expect to see the savings passed on to them.

Cable operators can also expect considerable savings after fully deploying DOCSIS 3.1 technology that powers their broadband services. The next generation cable broadband platform offers increased efficiency and flexibility that will allow operators to sell faster speeds.

Comcast may stand apart from others believing deluxe set-top boxes like its X1 are urgently needed to keep cable TV customers satisfied. One of Comcast’s largest planned expenses is deploying millions more of these advanced platforms to customer homes in 2016.

Next year’s upgrade to DOCSIS 3.1 will support cable broadband speeds up to one gigabit shortly after introduction.

Telephone companies relying on traditional ADSL service to power their broadband offering will likely face a renewed competitive assault in 2016 that will further reduce their already-challenged market share in areas where cable companies compete.

Cable operators are hungry for profitable broadband customers and the best place to find new prospects is at the phone company, where DSL is still a common technology to deliver Internet access. But while cable Internet speeds have risen, significant DSL speed hikes have proven more modest in the residential market.

In 2016, the cable industry intends to poach some of the remaining price-sensitive holdouts still clinging to DSL with revised broadband offers promising more speed for the dollar.

Cable broadband has already proven itself a runaway success when matched against telephone company DSL service. Over the last year, Strategy Analytics found Comcast and Time Warner Cable alone signed up a combined 71 percent of the three million new broadband customers in the U.S.

“Cable operators continue to increase market share in U.S. broadband,” said Jason Blackwell, a director at Strategy Analytics. “Over the past twelve months, Comcast has accounted for 42 percent of new subscribers among the operators that we track.  Fiber growth is still strong, but the telco operators haven’t been able to shake off the losses of DSL subscribers.  In 2016, we expect to see a real battle in broadband, as cable operators begin to roll out DOCSIS 3.1 for even higher speed offers, placing additional pressure on telcos.”

That battle will come in the form of upgraded economy broadband plans, many arriving shortly after providers upgrade to the DOCSIS 3.1 cable broadband platform. Currently those plans offer speeds ranging from 2-6Mbps. Starting next year, customers can expect economy plan prices to stay generally comparable to DSL, with promises of faster and more consistent speeds. A source tells Stop the Cap! at least two significant cable operators are considering 10Mbps to be an appropriate entry-level broadband speed for 2016, in keeping with FCC chairman Thomas Wheeler’s dislike of Internet speeds below 10Mbps.

Just a few years earlier, most providers wouldn’t think of offering discounted 10Mbps service, fearing it would cannibalize revenue as customers downgraded to get lower priced service. Increasing demands on bandwidth from online video and multiple in-home users have gradually raised consumer expectations, and their need for speed.

Unfortunately for many phone companies that have neglected significant investment in their aging wireline networks, the costs to keep up with cable will become unmanageable unless investors are willing to tolerate significant growth in capital expenses to pay for network upgrades. Frontier Communications still claims most of their customers are satisfied with 6Mbps DSL, neglecting to mention many of those customers live in areas where cable competition (or faster service from Frontier) is not available.

Where competition does exist, it’s especially bad news for phone companies that still rely on DSL. Earlier this year, Frontier’s former CEO Maggie Wilderotter admitted Frontier’s share of the residential broadband market had dropped to less than 25% in 26 of the 27 states where it provides service. In Connecticut, the one state where Frontier was doing better, its acquired AT&T U-verse system has enabled the phone company to deliver broadband speeds up to 100Mbps. But even those speeds do not satisfy state officials who are seeking proposals from providers to build a gigabit fiber network in a public-private partnership.

DSL speed upgrades have been spotty and more modest.

Frontier’s recent experiments with fiber to the home service in a small part of Durham, N.C., and the unintentional revelation of a gigabit broadband inquiry page on Frontier’s website suggests the company may be exploring at least a limited rollout of gigabit fiber service in the state. But company officials have also repeatedly stressed in quarterly results conference calls there were no significant plans to embark on a major spending program to deliver major upgrades across their service areas.

Some phone companies may have little choice except to offer upgrades where cable operators are continuing to rob them of customers. In the northeast, where Frontier has a substantial presence, cable operators including Charter, Comcast and Time Warner Cable are committing to additional speed upgrades. Time Warner Cable’s current standard speed of 15Mbps will rise to 50-60Mbps in 2016, up to ten times faster than Frontier’s most popular “up to” 6Mbps DSL plan.

Most of the broadband customer gains won by Comcast and Time Warner Cable come as a result of DSL disconnects. AT&T said goodbye to 106,000 customers during the third quarter. Verizon managed to pick up 2,000 new subscribers overall, almost all signing up for FiOS fiber to the home service. No cable operator lost broadband market share, reported analyst firm Evercore. Leichtman Research offered additional insight, finding AT&T and Verizon were successful adding 305,000 U-verse and FiOS broadband customers, while losing 432,000 DSL customers during the same quarter.

The message to phone companies couldn’t be clearer: upgrade your networks or else.

Any final approval of Charter Communication’s planned acquisition of Time Warner Cable and Bright House Networks will likely not come before next summer, as regulators in California decide to take a closer look at the blockbuster merger deal that would make Charter the second largest cable company in the country.

An administrative law judge is contemplating the merger’s impact on California, and a decision is unlikely to come before May 2016, with a final vote of the California Public Utilities Commission tentatively scheduled for June 16th. The judge agreed with consumer groups that the deal warrants evidentiary hearings — a sign the deal deserves additional scrutiny.

New York State’s Public Service Commission is also still reviewing the transaction, although it is expected to render a decision within the next few months. On the federal level, the FCC has also not held back, recently requesting answers to a number of questions regarding John Malone’s involvement in the future of “New Charter.” Malone remains Charter’s biggest single shareholder and could wield considerable control over New Charter’s operations. Considering Malone’s long history of antagonizing customers and engaging in what lawmakers called anti-competitive behavior during his realm at Tele-Communications, Inc. (TCI), regulators may not want to see history repeat itself.

What was originally anticipated by industry observers to be an ‘easy approval,’ is now looking more like Comcast’s failed bid for Time Warner Cable, as regulators seem to be in no hurry to give Charter’s deal a green light.

If regulators do ultimately approve the deal, it is likely to come with a number of conditions designed to at least temporarily protect consumers and competitors. Stop the Cap! argued in filings with state and federal regulators Charter’s proposal was uncompelling and consumers were unlikely to benefit from the deal. Time Warner Cable’s ongoing Maxx upgrade program delivers faster Internet speeds and better service than Charter’s more modest proposal offering upgrades up to 100Mbps. Time Warner Cable Maxx offers customers up to 300Mbps broadband for the price the company now charges for 50Mbps.

Time Warner Cable customers who purchased their own cable modems to avoid the company’s $8 monthly rental fee will effectively be forced to indirectly pay those fees once again if Charter Communications wins approval to buy the cable operator.

A major modem manufacturer, Zoom Telephonics, has asked the Federal Communications Commission to reject Charter’s buyout of Time Warner Cable and Bright House Networks because it will hurt cost-conscious consumers that invested in their own equipment to avoid costly modem rental fees.

Zoom’s argument is that Charter builds modem fees into the price of its broadband service and offers no discounts to consumers that own their own equipment. At least 14% of Time Warner Cable customers have purchased their own modems and are not charged the $8 rental fee. Charter has promised not to charge separate modem fees for three years after its acquisition deal is approved, but that also means the company is building the cost of that equipment into the price of broadband service.

Zoom has an interest in the outcome because Charter has yet to approve any Zoom cable modem model for use on its network. Time Warner Cable has certified at least one Zoom model in the past. Assuming the buyout is approved, consumers would have a disincentive to buy Zoom cable modems (or those manufactured by anyone else) because the equipment will be provided with the service.

Zoom has tangled with Charter before, most recently in the summer of 2014 when it criticized Charter’s policy forbidding new customers from using their own modems with Charter’s service. From June 26, 2012 until Aug. 22, 2014, Charter’s website stated, “For new Internet Customers and customers switching to our New Package Pricing, we will no longer allow customer owned modems on our network.”

Zoom claims Charter modified that policy three days before a key FCC filing deadline that could have eventually brought regulator attention on the cable operator. But Zoom remains unhappy with how Charter deals with the issue of customer-owned equipment.

“Charter has still not adopted certification standards that are open to Zoom and other cable modem producers, nor has Charter yet made a commitment for timely certifications under this program,” Zoom claimed in the summer of 2014. “Of the 17 cable modems Charter shows as qualified for customer attachment to its network, not one is stocked by leading cable modem retailers Walmart, Staples, and Office Depot and not one has 802.11ac wireless capability. Charter still does not separately list the cost of its leased modems on customer bills, and Charter does not offer a corresponding savings to all customers who buy a qualified cable modem and attach it to the Charter network.”

Zoom wants Charter to be required to offer consumers that own their own equipment a tangible monthly discount for broadband service as a condition of any merger approval.

“The Communications Act says that cable companies should sell cable modem leases and Internet service separately,” Andrew Jay Schwartzman, a professor at Georgetown University Law Center who is representing Zoom, told the Los Angeles Times. “By combining the prices, Charter’s customers are deprived of the ability to purchase advanced cable modems and save the cost of monthly rental fees.”

Charter argues the Act only covers set-top boxes used for cable television service, not modem fees. Charter also claims its introductory prices are lower than what most cable companies charge, modem fee or not.

“Customers will benefit from Charter’s pro-customer and pro-broadband model with transparent billing policies,” Tamara Smith, a Charter spokeswoman, told the newspaper. “It features straightforward, nationally uniform pricing with no data caps, no usage-based pricing, no modem fees, no early termination fees and does not pass on federal or state Universal Service Fund fees to customers.”

But Charter is only guaranteeing those customer-friendly policies for three years, after which it can raise prices and add fees at will.

An expert hired by Charter Communications to offer “qualified” views on the competitive impact of a merger involving Charter, Bright House Networks, and Time Warner Cable got his facts wrong about Charter’s data cap policy, a mistake that calls into question his analysis about the company’s potential to abuse broadband customers by imposing data caps after its three-year commitment not to expires.

Theodore Nierenberg, a professor of economics at the Yale School of Management, among other things, offered an expansive rebuttal to opponents of the Charter merger deal, arguing that it would enhance competition and deliver consumers enhanced benefits.

Nierenberg does not believe Charter has any interest in imposing data caps on customers, despite the fact Charter quietly shelved existing caps on Oct. 1, 2014, several months before unveiling a bid for both Time Warner and Bright House, neither of which have capped customer usage.

“I conclude that actions such as charging interconnection fees, imposing usage based billing or data caps, or degrading network performance are very unlikely, both because New Charter has no incentive to undertake them, and because the FCC will enforce New Charter’s commitments,” Nierenberg wrote.

But his facts are in error. The same company that believed usage caps were an essential part of its broadband service between early 2009 until October 2014 has suddenly turned over a new leaf? Nierenberg claims there was effectively no leaf to turn, claiming Charter had no “active data cap” since January 2012¹:

For 3 years, New Charter will not charge consumers additional fees to use specific third-party Internet applications, or engage in zero-rating (discriminatory exemptions from a data cap).

These binding commitments provide further assurance beyond the economic reasoning I describe below — assurance that New Charter will not engage in these types of conduct: charging higher interconnection fees, using discriminatory data plans, or reducing the quality of OVD signals. (Note that Charter already does not have data caps for its residential broadband customers. Notwithstanding the dramatic but welcome rise in data usage by broadband customers, Charter has not had an active data cap since January 2012.)

Customers in some areas were called by Charter for exceeding their usage allowance, and usage rationing remained a fact of life in Charter’s Acceptable Use Policy until late last year, not January 2012 as Nierenberg claims.

So what assurance should a customer take from a company that believed strongly in usage caps for more than five years? Surely not that Charter will never consider engaging in data capping yet again three years from now.

Charter can assure consumers of its good intentions by declaring it will always offer affordable unlimited access Internet without a three-year expiration date. Quietly dropping a cap several months before executing a well-planned buy of Time Warner Cable and Bright House doesn’t inspire confidence. Too often short term rate freezes are followed by accelerated rate hikes once the deal conditions expire.

¹ Page 48