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.

KJWY-TV was a station in Jackson, Wyo. But now it serves Philadelphia, Pa.

Two small television stations in Wyoming and Nevada with audiences in the thousands have packed up and are moving to bigger cities after exploiting a loophole in FCC rules.

KJWY, Channel 2 in Jackson, Wyo. used to relay television programs from a Casper station for the benefit of the 9,500 people living in the Teton County community. The station operated with just 178 watts — the lowest powered digital VHF station in the country. KVNV, Channel 3 in Ely, Nev., originally relayed Las Vegas’ NBC affiliate for the benefit of 4,200 locals. Both stations were purchased at a very low-cost by a mysterious partnership of buyers back east.

Today, KJWY has a new call sign – KJWP. It’s still on Channel 2, but the station is now licensed to operate from Wilmington, Del, with its transmitter located just across the border in Philadelphia. It’s one of the rare few television stations in the eastern half of the country that have “K” call letters usually assigned to stations west of the Mississippi River. KVNV is expected to follow to its new home in Middletown Township, Monmouth County, N.J., later this year. Its transmitter will have nothing but open water between northern New Jersey and nearby New York City — its intended target.

The two stations’ original combined audiences likely never exceeded 10,000, because both stations had very limited range for their transmitters which served two very small communities. But in the big cities of New York and Philadelphia, the stations can now reach a potential audience north of ten million and collect advertising revenue the stations in Wyoming and Nevada could only dream about.

PMCM, LLC., obviously had this in mind when it acquired the two stations in 2009. The principals behind PMCM already own six Jersey Shore radio stations in Monmouth and Ocean County under the name Press Communications, LLC.

How Congress and the FCC Opened the Door

PMCM discovered a little-known law that was originally introduced to help spur the launch of VHF television stations serving small Mid-Atlantic states shadowed by nearby large cities. In 1982, New Jersey Sen. Bill Bradley attached an amendment to an unrelated tax bill that required the FCC to automatically renew the license of any commercial VHF station that agrees to move to a state without one. The new law superseded nearly all the FCC’s other licensing regulations. At the time the law was passed, the only two states that were without any commercial VHF stations were Delaware and New Jersey.

That summer, RKO General, embroiled in a major scandal over illegal billing irregularities and deceiving regulators, thought it could save its New York station – WOR-TV – from threatened license revocation by agreeing to move from New York City to Secaucus, N.J. In agreeing to move the station, WOR would also expand much-needed coverage of New Jersey news and current affairs. But viewers barely noticed and by 1987 RKO General’s bad behavior got them booted out of the broadcasting business altogether after what FCC administrative law judge Edward Kuhlmann called a pattern of the worst case of dishonesty in FCC history. WOR’s new owners changed the call sign to WWOR-TV and the station’s home remains in Secaucus.

Two things happened after the mess with WOR. Bradley’s law remained on the books and America’s adoption of digital over the air television for full power stations meant channel number changes for many stations by the time the transition was complete in 2009. WWOR-TV relocated to UHF channel 38 (while still promoting itself as Channel 9) and Delaware’s only remaining VHF station is non-commercial WHYY Channel 12, a PBS station better known as hailing from Philadelphia. Once again, New Jersey and Delaware were without commercial VHF stations, a fact that did not escape the notice of PMCM.

Me-TV Launches in Philadelphia and New York

After a lengthy court battle with the FCC, PMCM successfully moved and relaunched KJWP, Channel 2, on March 1 as Philadelphia’s Me-TV affiliate. Although the transmitter power was raised, the station’s digital VHF signal still doesn’t reach very far, so its owners invoked “must-carry” with area cable systems, which means cable systems must carry the channel so long as the station does not ask for any payment.

The station’s reach is defined by the FCC far beyond its actual broadcast signal. Officially, the station can demand cable carriage as far south as Dover, Del., as far west as Lancaster, Pa., almost all of southern New Jersey and into northern New Jersey. Today, Comcast and other cable systems carry KJWP across Philadelphia and the Delaware Valley. Verizon FiOS is adding the station by this weekend and it is also available via satellite TV local station packages. Unlike larger stations fighting to be paid by cable systems, KJWP is happy to be carried by all without charge because it can sell advertising to a much larger potential audience. It plans to produce local programming, including news, which opens up even more advertising opportunities.

KVNV remains on the air in Ely for now as a My Family TV affiliate, showing a mix of family friendly and religious programs. But its days as a Nevada broadcast station are numbered. KVNV will officially sign-off in Ely for good in a few months and relaunch operations across the New York City market as New York’s official Me-TV affiliate. Like with KJWP, KVNV will keep its original call letters and invoke must-carry, which means the station is likely to appear on northern New Jersey Comcast systems, Time Warner Cable in Manhattan and other boroughs, as well as Cablevision on Long Island and across parts of Brooklyn.

One of Comcast’s biggest investments of 2014 won’t pay to boost broadband speeds, improve customer service, or upgrade cable systems.

Today the cable company announced plans to spend an extra $2.5 billion — $5.5 billion total — this year to buy shares of its own stock in a share buyback program designed to please investors.

The extra investment will only come if shareholders approve the deal to merge Comcast and Time Warner Cable into a single company. If the merger is successful, Comcast is prepared to spend even more on share buybacks with money it plans to collect from the sale of three million current Time Warner customers that will be spun away in the merger.

Bloomberg News reports Comcast shares have fallen 10 percent since the acquisition was announced last month, reducing the value of the company’s all-stock offer. The proposal of 2.875 in Comcast stock for each Time Warner Cable share was worth $142.49 a share last week, down from $158.82 the day the transaction was made public.

By buying back shares in its own stock, Comcast will cut the number of shares outstanding, which increases earnings per share and usually boosts the stock’s price. The share repurchase will benefit shareholders and any top executives who receive bonuses based on successfully increasing the value of earnings per share. Customers get nothing.

Neither will the tax man if Comcast and Time Warner Cable structure its deals as spinoffs qualifying as tax-free transactions.

Comcast customers using the company’s growing network of Wi-Fi network hotspots will have their usage tracked to their broadband accounts, opening the door for Comcast to count wireless use against a customer’s future monthly usage allowance.

As part of a press release announcing that more than 300,000 Comcast hotspots are now available in New England, the cable company added that it is preparing to activate its Xfinity Wi-Fi Neighborhood Hotspots in the region, allowing other Comcast customers to share your Comcast Internet service over a separate Wi-Fi channel provided by your gateway. But it noted customers will need to log-in first, permitting Comcast to measure just how much of the wireless service you are using:

Xfinity WiFi Neighborhood Hotspots – In June of last year, Comcast announced its plans to create millions of WiFi access points for its customers through a neighborhood hotspot initiative. Comcast is the first major ISP in the country to deploy this innovative technology. This new initiative gives customers with Xfinity Wireless Gateways an additional “xfinitywifi” signal (or SSID) in their home that is completely separate and distinct from the private and secure home WiFi signal. Offered at no additional cost, the additional WiFi signal will allow visiting Xfinity Internet subscribers instant, easy access to fast and reliable WiFi without the need to share the home’s private network password and without an impact to the home subscriber’s speed. And since visitors sign in with their own Xfinity credentials, their usage and activities are tied back to their own accounts, not the homeowner’s.

Comcast is testing the reimplementation of a usage cap – now set at 300GB a month – in several cities in the southern U.S. Wireless usage could eventually also be counted against that cap.

Many of Comcast’s primary outdoor hotspots are in larger cities, such as Greater Boston. Most of the one million total hotspots Comcast hopes to activate are located in residential customers’ homes using Comcast’s Wireless Gateway.