Big, Bigger, Biggest… Bigger Still

Comcast has plenty of available bandwidth to indefinitely expand its High Speed Internet services at speeds up to 3Gbps and believes it has won the legal right to grow its cable business as large as it likes.

Comcast executives admitted Wednesday they have more than enough network capacity to meet the demands of customers, both now and well into the future.

“With regard to usage and capacity, we feel the network is flexible and has plenty of opportunity to grow in capacity,” said Neil Smit, president and CEO of Comcast Cable Communications. Smit was responding to a Wall Street analyst asking about future capacity during a quarterly financial results conference call.

Smit noted that some of the biggest bandwidth users served by Comcast are businesses, and the cable operator was well-positioned to service them by extending fiber or deploying its Metro Ethernet product. Residential customers get increased bandwidth through neighborhood node splitting or DOCSIS 3 channel bonding that combines several channels together to increase speed and capacity.

Brian Roberts, CEO of Comcast Corporation, agreed with Smit, adding, “the more the consumer desires speed, the better that is for our company.”

Roberts noted DOCSIS 3.1 — the next generation of cable broadband — was “promising technology.”

“At the cable convention, we demonstrated 3Gbps” over Comcast’s existing cable infrastructure, said Roberts.

Smit

Comcast is easily the country’s largest cable operator, but many believe it is restrained from growing larger through mergers and acquisitions because of antitrust concerns. But thanks to a number of lawsuits initiated by Comcast, the company believes it can now grow as large as it likes.

Roberts admits the question of cable industry consolidation remains a gray area, particularly for Comcast. But he told investors he does not believe there are any remaining legal hurdles preventing Comcast from buying out other cable operators, despite earlier FCC rulemakings limiting the maximum size a cable company can grow through buyouts.

Comcast yesterday announced its last buyout — NBCUniversal — helped fuel a 29% increase in net income in the second quarter, thanks in part to strong results from film and television.

But many of Comcast’s largest gains came from its cable business.

Despite continued losses of video subscribers (159,000 in the second quarter), Comcast’s cable revenue increased 5.8% to $10.47 billion, and operating cash flow grew 5.7% to $4.3 billion. Comcast, which also owns several NBC broadcast affiliates, is playing for both sides of the retransmission consent wars. Its owned and operated television stations have demanded higher fees to be carried on cable systems, many owned by Comcast itself. The increased programming costs fuel subscriber rate increases, which also boost revenue.

Broadband is way up, although the company keeps losing video customers to cord-cutting.

Comcast’s broadband revenue has continued to grow dramatically. Customer additions for High Speed Internet access were up more than 20% in the quarter — the best second-quarter growth in five years — even as subscribers paid more for the service because of rate increases. Customer growth and price hikes delivered 8% growth in broadband revenue. In the last quarter alone, Comcast earned $2.6 billion from its broadband business.

Comcast is not spending a significant percentage of that revenue on enhanced broadband network upgrades. Instead, the company has increased investments to wire office parks and businesses to entice commercial customers, which account for a substantial amount of new customer growth. Comcast is also investing in research and development of new products and services, such as set-top boxes. The company also expects to pay 10% more in programming costs than it did a year earlier.

Year-to-date cable communications capital expenditures have increased 7.1% to $2.3 billion representing 11.3% of cable revenue. Comcast expects that for the full-year of 2013, cable capital expenditures will increase by about 10% over 2012.

Some other highlights from the quarter:

• In the last six months, Comcast completed broadband speed increases for 70 percent of its customers;
• High Speed Internet revenue was again the largest contributor to Comcast’s cable revenue growth;
• At the end of the quarter, 33% of Comcast’s residential high-speed customers take a higher speed tier above its primary service;
• Comcast has pushed Wi-Fi hard, installing more than four million wireless gateways and boosted Wi-Fi coverage to 250,000 hotspots through both cable partnerships and its home hotspot initiative;
• Comcast’s new X1 cloud-based set-top platform has been introduced to more than half of its national service area and will be available everywhere by the end of 2013. By the end of the year, Comcast also expects to push a firmware update to installed boxes to upgrade them to its new X2 platform;
• The average Comcast subscriber now pays the company $160 per month, up 7.4% from last year. Rate hikes, speed upgrades and growing programming packages account for the higher price;
• 77% of Comcast video customers took at least two products and among those, 42% took phone, broadband and television service.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Bloomberg Comcasts Cable and Media Units Grow 7-31-13.flv[/flv]

Bloomberg reports Comcast is still having trouble holding on to its video-only customers, but broadband customer growth continues to explode. Comcast also does well because it owns a number of cable networks and entertainment properties. Expect Comcast to continue evolving its products to bring them closer to the things people do online.  (3 minutes)

Although cable and phone companies love to declare themselves part of a fiercely competitive telecommunications marketplace, it is increasingly clear that is more fairy tale than reality, with each staking out their respective market niches to live financially comfortable ever-after.

In the last week, Time Warner Cable managed to alienate its broadband customers announcing another rate increase and a near-doubling of the modem rental fee the company only introduced as its newest money-maker last fall. What used to cost $3.95 a month will be $5.99 by August.

The news of the “price adjustment” went over like a lead balloon for customers in Albany, N.Y., many who just endured an 18-hour service outage the day before, wiping out phone and Internet service.

“They already get almost $60 a month from me for Internet service that cuts out for almost an entire day and now they want more?” asked Albany-area customer Randy Dexter. “If Verizon FiOS was available here, I’d toss Time Warner out of my house for good.”

Alas, the broadband magic sparkle ponies have not brought Dexter or millions of other New Yorkers the top-rated fiber optic network Verizon stopped expanding several years ago. The Wall Street dragons complained about the cost of stringing fiber. Competition, it seems, is bad for business.

In fact, Verizon Wireless and Time Warner Cable are now best friends. Verizon Wireless customers can get a fine deal — not on Verizon’s own FiOS service — but on Time Warner’s cable TV. Time Warner Cable originally thought about getting into the wireless phone business, but it was too expensive. It invites customers to sign up for Verizon Wireless service instead.

This is hardly a “War of the Roses” relationship either. Wall Street teaches that price wars are expensive and competitive shouting matches do not represent a win-win scenario for companies and their shareholders. The two companies get along fine where Verizon has virtually given up on DSL. Time Warner Cable actually faces more competition from AT&T’s U-verse, which is not saying much. The obvious conclusion: unless you happen to live in a FiOS service area, the best deals and fastest broadband speeds are not for you.

Further upstate in the Rochester-Finger Lakes Region, Time Warner Cable faces an even smaller threat from Frontier Communications. It’s a market share battle akin to United States Cable fighting a war against Uzbekistan Telephone. Frontier’s network in upstate New York is rich in copper and very low in fiber. Frontier has lost landline customers for years and until very recently its broadband DSL offerings have been so unattractive, they are a marketplace afterthought.

Rochester television reporter Rachel Barnhart surveyed the situation on her blog:

Think about this fact: Time Warner, which raked in more than $21 billion last year, has 700,000 subscribers in the Buffalo and Rochester markets. I’m not sure how many of those are businesses. But the Western New York market has 875,000 households. That’s an astounding market penetration. Does this mean Time Warner is the best choice or the least worse option?

That means Time Warner Cable has an 80 percent market share. Actually, it is probably higher because that total number of households includes those who either don’t want, need, or can’t afford broadband service. Some may also rely on limited wireless broadband services from Clearwire or one of the large cell phone companies.

In light of cable’s broadband successes, it is no surprise Time Warner is able to set prices and raise them at will. Barnhart, who has broadband-only service, is currently paying Time Warner $37.99 a month for “Lite” service, since reclassified as 1/1Mbps. That does not include the modem rental fee or the forthcoming $3 rate hike. Taken together, “Lite” Internet is getting pricey in western New York at $47 a month.

Retiring CEO Glenn Britt believes there is still money yet to be milked out of subscribers. In addition to believing cable modem rental fees are a growth industry, Britt also wants customers to begin thinking about “the usage component” of broadband service. That is code language for consumption-based billing — a system that imposes an arbitrary usage limit on customers, usually at current pricing levels, with steep fees for exceeding that allowance.

Rochester remains a happy hunting ground for Internet Overcharging schemes because the only practical, alternative broadband supplier is Frontier Communications, which Time Warner Cable these days dismisses as an afterthought (remember that 80 percent market share). Without a strong competitor, Time Warner has no problem experimenting with new “usage”-priced tiers.

Time Warner persists with its usage priced plans, despite the fact customers overwhelmingly have told the company they don’t want them. Time Warner’s current discount offer — $5 off any broadband tier if you keep usage under 5GB a month, has been a complete marketing failure. Despite that, Time Warner is back with a slightly better offer — $8 off that 5GB usage tier and adding a new 30GB usage limited option in the Rochester market. We have since learned customers signing up for that 30GB limit will get $5 off their broadband service.

In nearby Ohio, the average broadband user already exceeds Time Warner’s 30GB pittance allowance, using 52GB a month. Under both plans, customers who exceed their allowance are charged $1 per GB, with overlimit fees currently not to exceed $25 per month. That 30GB plan would end up costing customers an extra $22 a month above the regular, unlimited plan. So much for the $5 savings.

Unfortunately, as long as Time Warner has an 80 percent market share, the same mentality that makes ever-rising modem rental fees worthwhile might also one day give the cable company courage to remove the word “optional” from those usage limited plans. With usage nearly doubling every year, Time Warner might see consumption billing as its maximum moneymaker.

In 2009, Time Warner valued unlimited-use Internet at $150 as month, which is what they planned to charge before pitchfork and torch-wielding customers turned up outside their offices.

Considering the company already earns 95 percent gross margin on broadband service before the latest round of price increases, one has to ask exactly when the company will be satisfied it is earning enough from broadband service. I fear the answer will be “never,” which is why it is imperative that robust competition exist in the broadband market to keep prices in check.

Unfortunately, as long as Wall Street and providers decide competition is too hard and too unprofitable, the price increases will continue.

In addition to an August broadband rate increase for western New York’s Time Warner Cable customers, those in Rochester will also be among the first to experience a new 30GB usage-capped billing option for broadband service.

The subject of usage-based billing is a major sore spot for customers in the Flower City, who joined forces with customers in Greensboro, N.C., and San Antonio and Austin, Tex. to force the cable company to shelve a mandatory usage billing scheme announced in 2009. Stop the Cap! was in the middle of that fight, although this group was founded after Frontier Communications proposed a 5GB usage cap the summer before.

Time Warner Cable CEO Glenn Britt personally promised Sen. Charles Schumer (D-N.Y) that the cable company would yank its planned experiment with usage caps and consumption-based billing after it became clear Rochester and other cities were being singled out where Verizon FiOS would never offer competition, making it seem Time Warner was taking advantage of a lack of broadband competition to charge dramatically higher prices.

In 2009, Time Warner Cable planned mandatory broadband usage pricing starting in Rochester, N.Y., Greensboro, N.C., and San Antonio and Austin, Tex.

But Britt has never stopped believing in usage pricing, and Time Warner has since switched to a more gradual introduction of the pricing scheme, this time offering discounts to customers that agree to limit their Internet usage.

Time Warner’s current usage billing plan offers a meager $5 discount to those who limit consumption to less than 5GB per month. That plan was originally introduced in Texas and Time Warner Cable employees confidentially tell Stop the Cap! it has attracted almost no interest from customers.

Now Time Warner Cable plans to introduce a second usage limited plan, with a yet to be disclosed discount for subscribers who keep Internet usage under 30GB a month.

“Those who use the Internet for e-mail or to surf the web need not pay the same rates as those who download games and the like,” said company spokesperson Joli Plucknette-Farmen.

As far as we can tell, the 30GB capped plan is new for Time Warner Cable and Rochester will be among the first communities to experience it. Unless the company chooses to more aggressively discount both the 5GB and 30GB plans, we expect few customers will take Time Warner Cable up on their offer.

For now, Time Warner says the usage capped plans are optional and that flat rate Internet service will continue. But company executives have not said for how long or what the company might choose to eventually charge for unlimited broadband usage.

Britt has stressed repeatedly he wants customers to get re-educated to accept “a usage component as part of broadband pricing.” But customers may not accept that, particularly considering the cable company already enjoys a 95% gross margin on flat rate broadband service.

Bruce

Charging usage-based pricing and monetizing your use of the Internet is key to enhanced profits and higher earnings as broadband becomes the key product for cable operators.

That is the view of Robert Bruce, president of the communications division of Rogers Communications, eastern Canada’s largest cable operator.

“[The Internet] is the key to the future of our business, hence monetizing the increased bandwidth usage will rapidly become the future across all our businesses, whether it is wireless or wireline,” Bruce told a financial analyst in response to a question about ongoing Internet rate increases from the cable company. “There are clearly some unlimited offers out there and we think they are fairly shortsighted as the Internet is the future of the business.”

Bruce believes there is plenty of room for future rate increases, especially as the cable company boosts Internet speeds and ends network traffic management, improving the perceived quality of Rogers’ Internet service.

“We have significantly enhanced the value of this product and over time it is our plan to monetize it accordingly,” Bruce explained to the analyst. “The price increase that you receive in the mail would have just been one step in the monetization that we think will continue as Internet service becomes the backbone product in the home.”

Rogers admits it will continue to lower the bar on customers with usage caps and higher broadband pricing.

Ironically, Rogers is currently offering its own unlimited use plans, primarily in response to a competing offer from Bell.

Dr. Michael Geist, a broadband industry observer and law professor at the University of Ottawa notes competition is the only thing keeping Rogers’ pricing and usage caps in check.

“If the Bell offer disappears, so will the Rogers plan,” Geist predicts. “With limited competition, favorable pricing plans will come and go, with executives anxious to increase prices and implement usage caps. The only solution is sufficiently robust competition that all players are continually forced to improve service and keep pricing in check to retain and attract customers.”

Rogers may tell the public Canadian broadband is robustly competitive but the company signals something very different to the investor community. With OECD data already showing Canada among the ten most expensive countries for broadband service in the developed world, Rogers is primed to raise prices even higher as it further tightens Internet usage caps.

Rogers’ improvements in its broadband service do not necessarily correspond with the company’s pricing power. As consumers increasingly consider Internet access an essential utility in the digital economy, Rogers is finding it can set prices as it likes and regularly increase them without effective subscriber backlash. With most Canadians buying service from the cable or phone company, if both providers avoid a pricing war, investors will be able to extract OPEC-like earnings from the barely regulated service.

Providers routinely claim rate increases are tied to costly upgrades, but Rogers’ own financial statements and comments to shareholders say otherwise. The cost to deliver broadband service in Canada is dropping, but the price charged for Internet access and the overlimit fees collected when customers exceed their usage limit will continue to rise as a growing percentage of company revenue now depends on broadband service.

Time Warner Cable is once again raising its broadband prices, reflecting the fact Internet access continues to be a “must-have” product with room to raise the cost without driving customers away.

On average Time Warner Cable customers in the northeast with broadband-only service will pay $3 more a month starting Aug. 9, according to public relations manager Joli Plucknette-Farmen. Customers now pay $51 a month for 15/1Mbps service. After the increase, customers will pay $54.99, not including the modem rental fee. In early 2010, customers were paying $39.95, around $15 less.

Time Warner Cable’s new broadband prices will range from $34.99 a month for Lite 1/1Mbps service to $104.99 a month for 50/5Mbps service.

The rate hike will likely spread across the rest of Time Warner Cable’s systems around the country over the summer and fall.

Plucknette-Farmen said the increase will help the company offer the best possible broadband service.

Not every customer will immediately face higher pricing. Customers on promotional pricing packages will remain unaffected until those offers expire.

Because Time Warner Cable increasingly prices its services on a customer-by-customer basis, assessing the full impact of rate changes is extremely difficult because customers can pay dramatically different rates for the same services. A Time Warner Cable customer paying regular prices for standalone Internet service will find their neighbors with bundled service packages paying much less and those with promotional/customer retention deals paying the lowest rates of all.

In 2012, Stop the Cap! wrote a guide for Time Warner Cable customers to negotiate a better deal for themselves. Readers report the method still works.