One of the side benefits of Google getting into the broadband provider business is learning first-hand what is reality and what represents provider spin and marketing nonsense used to justify high prices and usage limits.

As Google Fiber slowly spreads across Kansas City, the search engine giant is gaining first hand-experience in the broadband business. Google understands what cable operators endured in the 1980s and what Verizon was coping with until it pulled the plug on FiOS expansion: the upfront costs to build a new network that reaches individual subscribers’ homes and businesses can be very high. But once those networks are paid off, revenue opportunities explode, particularly when delivering broadband service.

Milo Medin, a former cable Internet entrepreneur and now vice president of access services at Google, presented a cogent explanation of why Google can make gigabit broadband an earner once construction costs are recouped. He demonstrated the economics of fiber broadband at a meeting of the San Jose chapter of the IEEE.

In addition to a long term investment in fiber, and the new business opportunities 1,000Mbps Internet provides, Google has learned from the mistakes other utilities have made and is trying to establish close working relationships with local governments to find ways to cut costs and bureaucracy.

In Kansas City, Google has placed staff in the same office with city zoning and permit officials. Working together in an informal public-private partnership to cut red tape, local inspectors have agreed to coordinate appointments with Google installers to reduce delays. That alone reportedly saves Google two percent in construction expenses.

“Governments have policies that can make it easy or hard, so I say, ‘if you make it hard for me, enjoy your Comcast,’” Medin said.

Internet traffic vs. costs

Medin notes broadband adoption and expansion in the United States is being artificially constrained by the marketplace, where wired providers are resting on their laurels.

More than a decade ago, people paid $40 a month for 4-5Mbps service, Medin noted.

Providers have kept the price the same, arguing they create more value for subscribers with ongoing speed increases.

But Medin notes overseas, prices are falling and speeds are increasing far faster than what we see in North America.

“Broadband in America is not advancing at nearly the pace it needs to be,” Medin argues. “Most of you have seen dramatic changes in wireless, but there’s never been a real step function increase in wired. That’s what’s needed for us to retain leadership in technology — and not having it is a big problem.”

Medin points to OECD statistics that show the cost per megabit per month in the U.S. is the sixth highest among 34 OECD nations. Only Mexico, Chile, Israel, New Zealand, and Greece pay higher prices. Every other OECD nation pays less.

By leveraging fiber optics, which every provider uses to some extent, costs plummet after network construction expenses are paid off. In fact, despite the explosion in network traffic, provider bandwidth costs remain largely flat even with growing use, which makes the introduction of Internet Overcharging schemes like usage caps and consumption-based pricing unjustified.

“Moving bits is fundamentally not expensive,” said Medin.

In 1998, when cable broadband first became available in many markets, the monthly price for the service was around $40 a month. Internet transit prices — the costs to transport data from your ISP to websites around the world averaged $1,200 per megabit that year. Today that cost has dropped below $4 per megabit and is forecast to drop to just $0.94 by 2015.

Windstream has announced the increased broadband investments that expanded DSL service to about 75,000 more homes and businesses and brought fiber connections to cell towers are nearly complete and the company intends to dramatically cut spending on further enhancements by the end of 2013.

Jeff Gardner, Windstream’s CEO, told investors on a conference call last week the company’s highest priority in 2013 is preserving its current dividend to create value for shareholders. Not on the priority list: improving broadband infrastructure to support video streaming services, further expanding broadband in areas it now bypasses, and boosting the quality of service it delivers to current customers.

Gardner called the company’s increased investment in 2011 and 2012 a result of “finite opportunities that provide[d] attractive investment returns.”

But most of that spending will come to an end next year.

“We expect to substantially complete our capital investments related to fiber to the tower projects, reaching 4,500 towers by the end of 2013,” said Gardner. “In addition, we will finish most of our broadband stimulus initiatives […] to roughly 75,000 new households. As we exit 2013, we will see capital spending related to these projects decrease substantially.”

That could be bad news for communities in places like Wayne County, Mo., which suffers with inadequate broadband from the company. In some areas when local broadband traffic reduces DSL speeds to a crawl, area businesses are occasionally forced to shut down for the day.

Broadband and business services now account for 70% of Windstream’s revenue, but it has come with a price: increased investment, that Wall Street considers negative to the company’s value. To satisfy analysts and shareholders, Gardner made it clear improving the balance sheet is a major priority. He said he will continue to direct excess free cash flow first to preserve the company’s shareholder dividend, and then direct much of the rest to debt repayment.

That does not mean Windstream will end all investments in its business. The company now spends 12.4% on ongoing capital investments and will continue to do so, but much of the spending will cover network upkeep and supporting more profitable business services.

“Over the last four years, our acquisitions have been very targeted on businesses that are growing in the strategic growth areas that we’re focused on, and we’ve really changed the mix very significantly here, away from the consumer business toward the enterprise space, and I think that puts us in a very different position with respect to the stability of our revenue and OIBDA over time,” Gardner added.

Windstream plans to bring back its “price for life” promotion this year.

Gardner noted Windstream is well-positioned to take advantage of the fact it has few competitors, which reduces pressure to invest and improve its networks to stay competitive.

“Our residential customers remain concentrated in very rural areas where there is less competition, which has contributed to a more stable consumer business,” Gardner admitted.

He added that those rural customers will have to rely on the company’s satellite partner Dish Networks for video services. Windstream will not build a “capital-intensive facilities based technology” to support online video. In contrast, CenturyLink has invested in Prism, a fiber-to-the-neighborhood service in several of its larger markets, to offer triple play packages of broadband, phone, and cable TV. Windstream has no plans to follow.

Despite investments in 2011 and 2012 to improve broadband service and speeds, Windstream’s DSL services have not kept up with its cable competitors.

During the last quarter, Windstream lost 2,000 broadband customers and 23,000 consumer voice lines (a 4.5% decline year over year).

To stem the tide of customers moving away from the phone company, Windstream is trying to sell value-added Internet support services, online backup, and faster speeds to maximize profitability. It will also add new customers made possible from federally funded broadband stimulus projects.

Windstream customers can expect to see increased promotional activity this year to win or keep their business:

• Covering the costs of switching from another provider to Windstream;
• A return to the “price for life” promotion, which promises stable rates as long as a customer stays with the company;
• A substantial introductory discount on satellite TV when bundled with Windstream’s own services.

Time Warner Cable’s Business Class division has introduced new high-speed broadband packages designed for at-home teleworkers and telecommuters. But unless you need the advanced security, prioritized repair, and assurances that your Business Class online traffic will take precedence over residential traffic on Time Warner’s broadband network, you may be better off with residential service.

Four Teleworkers Solutions broadband bundles are now available in New York, New England and the Carolinas:

There is a setup fee for $75-150, a $23 fee for a static IP (free with Basic Plus or Premium Plus service), and rates are guaranteed for 1-3 years depending on the final contract. Businesses with 20+ telecommuter accounts will receive a volume discount.

In contrast, the best available residential promotional price for broadband-only 50/5Mbps service in the northeast outside of New York City is $78.94 a month, which includes the modem rental fee, does not include a Wi-Fi router, and is good for 12 months before the prices increases.

Comcast’s David Cohen

Comcast is an American success story, but Americans that do business with the cable giant are getting slighted by overpriced, too-slow broadband service.

In a commentary piece in the Financial Times, Edward Luce indicts the company that bought NBC-Universal for pay-for-play campaign contributions that have kept the company from much  regulatory scrutiny and free to charge whatever it likes for a service now increasingly considered a necessity.

Comcast’s key employee as far as Washington is concerned is its senior vice-president, David Cohen, who also happens to be one of President Barack Obama’s largest fundraisers.

The revolving door between Comcast in Philadelphia and the federal government in Washington is always spinning.

Of Comcast’s 121 lobbyists, 85 are former government employees, according to Open Secrets, which monitors money and politics.

“Comcast employs the royalty of K Street [lobbyists],” says Sheila Krumholz, head of Open Secrets.

In 2011, the year the FCC approved Comcast’s merger with NBCU, the company spent more than $14 million on lobbying – the ninth-highest of any US company (it ranks 49th on the Fortune 100 list).

Luce adds Meredith Atwell-Baker, a former Republican FCC commissioner, took an executive position at Comcast shortly after voting to approve the merger-buyout between the cable operator and NBC.

This month Comcast acquired the 49 percent of NBC-Universal it did not already own in a $16.7 billion transaction that got less attention at the FCC than the lunch menu at the Chinese takeout down the street.

So while Comcast enriches itself, customers are left with Internet service that is nothing to brag about.

While only 7% of the U.S. is wired for fiber broadband, more than half of South Korea and Japan can buy fiber-fast broadband service from a range of broadband suppliers. Back home, Comcast and the local phone company have built a comfortable duopoly:

The company’s meteoric rise in the past decade parallels the relative decline of Internet service in the US. In the late 1990s the US had the fastest speeds and widest penetration of almost anywhere – unsurprisingly given that it invented the platform. Today the US comes 16th, according to the OECD, with an average of 27 megabits per second, compared with up to quadruple that in countries such as Japan and the Netherlands.

The contrast on price is just as unflattering. The average US cost for 1 Mbps is $1.10 compared with $0.42 in the UK, $0.34 in France and $0.21 in South Korea. It is not only places such as Hong Kong that put the US into the shade. Countries such as Estonia, Portugal and Hungary offer a significantly better Internet service. South Koreans joke that when they visit the US they are taking an Internet vacation. Yet bringing the US up to speed appears to be low on Mr Obama’s list of priorities (it did not even get a mention in his State of the Union address last month).

Verizon FiOS has made it easy for broadband customers to upgrade to 50/25Mbps service for $10 more a month.

Getting access to the company’s introductory Quantum tier is as simple as going to FiOS TV Channel 500 and clicking the OK button twice with your remote control. Within one hour, your speeds will be upgraded. For those who don’t subscribe to FiOS TV, you can visit the FiOS Quantum website or use the MyFiOS smartphone app.

A promotion for new customers includes an introductory offer of FiOS TV, Quantum 50/25Mbps, and telephone service for $89.99 a month with a $250 debit card rebate in certain markets.

Last summer, the company launched the Quantum brand to market its highest speed tiers: 50/25Mbps, 75/35Mbps, 150/65Mbps or 300/65Mbps.

Verizon says the company noticed an increasing demand for faster speed service because customers are connecting more devices to the Internet. Streaming multiple online videos at the same time, for example, can burden slower speed Internet services.

Verizon says the faster speeds also keep the company ahead of its cable competition, which has struggled to provide affordable faster tiers of service and remains limited on upstream speeds.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Verizon FiOS Quantum Upgrade 2-15-13.flv[/flv]

Verizon FiOS is now offering broadband customers a $10 upgrade to 50/25Mbps service just by clicking a button on your FiOS TV remote control twice.  (1 minute)