Charter Spectrum’s broadband-only customers run up more than double the amount of broadband usage average customers subscribing to both cable TV and broadband use, and that consumption is growing fast.

“Data usage by residential internet customers is rising rapidly and monthly median data usage is over 200 GB per customer,” Charter CEO Thomas Rutledge said on a morning quarterly results conference call. “When you look at average monthly usage for customers that don’t subscribe to our traditional video product, usage climbs to over 400 GB per month.”

Last week, Comcast reported its average broadband customer also used over 200 GB a month, but did not break out the difference between those subscribing to cable TV and those who do not. If Comcast’s broadband-only customers are consuming a comparable amount of data, they could be nearing half of their monthly usage allowance (1 TB), in markets where Comcast caps its customers’ usage. But because that is only an average, it means many more Comcast customers are likely nearing or now exceeding Comcast’s data cap, exposing them to hefty overlimit penalties.

Spectrum does not impose any data allowances on its customers — all usage is unlimited.

Charter officials also reported their average mobile customers use “well under 10 GB a month.” The fact Charter did not get more specific about mobile usage is important because the new product is getting scrutiny from some on Wall Street concerned it will have a hard time becoming profitable because of its wholesale agreement with Verizon Wireless, which provides the 4G LTE service for Spectrum Mobile.

Subscribers have been primarily drawn to the $14/GB plan, which includes unlimited talk and texting, because it offers a very low entry price for a full-function wireless plan. But a customer only needs to use more than 3 GB of service per month to find their bill higher than what they would pay subscribing to Spectrum Mobile’s $45 unlimited usage plan. If Charter executives said the average mobile user consumed 5 GB of data, analysts could deduce what the average customer bill probably looked like. To maximize profits, Charter needs customers to select an unlimited data plan and keep data usage low to assure it can cover the wholesale costs Verizon Wireless charges the cable company for wireless connectivity.

Rutledge

Rutledge stressed he expects Spectrum Mobile to be profitable with the current Verizon Wireless MVNO contract in place — the service simply needs a larger user base to overcome its current losses.

Rutledge also announced Spectrum Mobile was testing dual SIM technology, which could allow it to eventually offload more of its 4G LTE traffic to its own (cheaper) network, which could eventually include mid-band wireless spectrum and the CBRS spectrum the company is already testing for fixed wireless service for rural areas. Spectrum could also follow Comcast with its own in-home network of publicly available Wi-Fi or innovate with unlicensed wireless mobile spectrum using small cells or external antennas.

Charter executives noted that customer data demands were pushing many to upgrade to higher speed internet products.

“Over 80% of our internet customers are now in packages that deliver 100 Mbps of speed or more and 30% of our customers are getting 200 Mbps or more,” Rutledge said. “We’re also seeing strong demand for our Ultra product, which delivers 400 Mbps, and we have gigabit service available everywhere.”

The costs to continue upgrading service for broadband customers are negligible on the company’s current platform, Rutledge admits. In the future, Charter Spectrum is considering offering 10 Gbps and 25 Gbps symmetrical service to customers, and it can scale up upgrades very quickly.

“For example, in only 14 months we launched DOCSIS 3.1, which took our speeds up to 1 Gbps across our entire footprint at a cost of just $9 per passing,” Rutledge said.

Verizon’s not-quite-ready-for-prime-time mobile 5G network hurriedly held a public launch event April 3rd using a small network of 5G millimeter wave small cells installed in downtown Chicago and Minneapolis, despite employee admissions there were significant issues with the network’s reliability, coverage, and stability.

Driving Verizon was a chance to win bragging rights by claiming ownership of the world’s first, publicly available, mobile 5G network. In a company-produced video intended for employees, it quickly becomes apparent Verizon was preoccupied by South Korea’s own race to launch mobile 5G, and daily meetings at Verizon’s offices in New Jersey hinted at pressure to announce Verizon’s own 5G launch day as soon as possible.

It was also clearly a priority for Verizon’s new CEO, Hans Vestberg.

“Since I came into Verizon, this is the first thing I wanted to do,” Vestberg said. “I want to be first on 5G in the world.”

But was the network ready for launch and fit for purpose? As of April 1, there were still coverage, latency, and speed issues. Garima Garg, from Verizon’s Network Performance, said the 5G network was “very unstable” early in the first week of April. Attempts to test every smart cell in Chicago were unsuccessful. Garg said the team couldn’t connect to several of them.

Besides beating South Korea, Verizon’s goal was to launch 5G with speeds better than its 4G LTE network and AT&T’s enhanced 4G LTE service it calls “5Ge.” To test network performance, Verizon employees ran countless speed tests, often just across the street from light pole-mounted smart cells around 100 feet away. Just a day or so from launch, Verizon testers were still trying to address network problems, including packet loss and delayed acknowledgments on the TCP side of the uplink, which ‘really hurt speed.’ Verizon claims it resolved some of these problems in the final hours before launch with a custom software build.

Verizon’s efforts almost came to naught, because SK Telecom, South Korea’s largest wireless operator, suddenly surprised the public with a star-studded “5G Launching Showcase” the morning of the 3rd. SK Telecom technically beat Verizon’s attempt to be first to launch, but Verizon pointed out only a handful of celebrities, social media influencers and so-called “brand promoters” were given smartphones capable of connecting to SK Telecom’s 5G network. Verizon’s spin was that South Korea’s launch was effectively a publicity stunt, as no consumer could walk into a store and buy 5G capable devices on that date. Verizon’s launch, however, would be different. Any customer could immediately walk into a Verizon store in the two launch cities and walk out with a smartphone capable of connecting to 5G on the first day the network was switched on. Just in case SK Telecom had any other surprises planned, Verizon decided to move up its official launch date.

Garg (Image courtesy of: Verizon)

On the morning of April 3, Vestberg appeared in a friendly and exclusive CNBC interview announcing the launch of Verizon’s 5G mobile network. By the following day, tech reporters in Chicago gave the network its first thorough test, and found many of the same issues that had concerned Verizon engineers earlier that week. Not only was Verizon’s 5G service area miniscule, several small cells appeared not to be working at all (or at least were not available for connections), and after a day using Verizon’s 5G network, the service was deemed “unreliable” by PC.

Reporters used Moto Z3 phones with the new 5G Moto Mod back panel, which snaps on the back of the phone and delivers 5G connectivity to the Z3. The Mod concept is neither an elegant or inexpensive solution, turning the Z3 into a bulky and heavy handset. The Moto Mod also has its own battery, and not a high-capacity one at that. Testers reported it was dead after five hours of significant use. It cannot be recharged by the phone either. At some locations, reporters were able to verify Verizon’s 5G network did deliver a significant improvement in speed — up to 600 Mbps peaks on small cells that likely had few, if any other customers connected at the time. But the densest parts of Chicago’s downtown were already well-served by Verizon’s 4G LTE network, which capably peaked at 400 Mbps.

Verizon’s mobile 5G network relies on millimeter wave frequencies, which are very short-range and sensitive to solid objects, which can block or degrade the signal. Despite Verizon’s earlier claim that it saw better than anticipated range and performance from the company’s millimeter wave fixed wireless service running in a few other cities, real world testing showed the effective range of Verizon’s smart cells was less than expected for mobile users. Verizon claimed up to 800 feet of range from each 5G small cell, but testing found that claim wildly optimistic.

“I saw more like 300 feet of effective range, with speeds dropping below LTE levels beyond that, even though my 5G indicator would dutifully flicker on until about 450 feet,” reported PC’s
Sascha Segan. “The Mod seems unable to judge when a 4G connection would be better than a 5G one, so it hangs on to 5G for dear life even if it’s just eking out a few megabits. A phone should probably prefer a good lower-gen connection over a poor higher-gen one.”

Real world testing also revealed the expected shortcomings of mobile 5G — it can be downright terrible indoors.

“Stand under the cell site, you get 600 Mbps down. Go into the Starbucks, through glass, and that’s cut to 218 Mbps,” Segan wrote. “Go around the corner and duck into the lobby of a stone building that doesn’t face onto the site, and you’re down to 41.5 Mbps. Lower frequency bands do not have this behavior.”

Of course, it is early days for Verizon’s 5G and network and software improvements are likely to significantly improve service. But Verizon’s experience strengthens the theory that small cells are likely to thrive only in dense population areas where there is already a high traffic demand. It seems unlikely that Verizon’s 5G network will make economic sense to deploy in outer suburbs and rural areas. It may not even play well in the suburbs.

Verizon produced this video covering the challenges launching their mobile 5G network in Chicago and Minneapolis in early April. (12:34)

Comcast and Charter Communications are losing money on their cell service plans because their partner, Verizon Wireless, sets its wholesale rates too high, making certain the two companies cannot cannibalize Verizon’s own customers for long.

MoffettNathanson analyst Craig Moffett claims the cable industry’s 2012 $3.9 billion sale of wireless spectrum to Verizon Wireless, which included an agreement allowing the two cable operators to resell Verizon Wireless service, turned out to benefit Verizon more than Comcast and Charter.

The problem is Verizon set its own price for service high enough to guarantee the two cable operators will have a hard time outcompeting Verizon Wireless. Moffett estimates Verizon is currently charging the two operators about $5/GB and around $5/month per customer for unlimited voice and texting. According to Moffett’s calculations, only the pay-per-gigabyte plans have any chance of marginal profitability. Comcast charges $12/GB for its pay-per-usage mobile plan; Charter charges $14/GB for essentially the same service. Both plans include unlimited voice and texting.

Things quickly get unprofitable when a customer signs up for Spectrum Mobile’s or Xfinity Mobile’s Unlimited plan (both $45/mo). Once a customer uses more than 8GB of 4G LTE data per month, Verizon’s wholesale price, including the cost of voice and texting, reaches the same amount those companies are charging customers for service. That does not include any of the ancillary costs Comcast and Charter have to pay to support and market their wireless plans.

Moffett believes the two companies overestimated how often subscribers would offload traffic to Wi-Fi, and the future potential for more solid Wi-Fi coverage “looks cloudy.” The problem, as Moffett sees it, appears to be the cable industry’s loss of interest building out their metro Wi-Fi networks. Moffett called the joint CableWiFi project between Comcast, Charter, Cox, and Altice USA “a bust” because the members of the coalition have largely stopped investing in new hotspot installations. That leaves about 500,000 working hotspots around the country, a number that has remained unchanged for two years. Only in-business Wi-Fi continues to grow, as business cable broadband customers are offered the opportunity to provide Wi-Fi service for their customers. But those hotspots don’t typically offer outdoor coverage.

Comcast has grown its Xfinity Mobile service to 1.2 million lines since launching in 2017 and Spectrum Mobile, which began in last September, had attracted almost 134,000 customers by the end of 2018.

This is the second part of a two-part series reflecting on Verizon’s 5G millimeter wave wireless home broadband service and how Wall Street complicates its potential. Be sure to read part one, “How a Wall Street Analyst Complicates AT&T and Verizon’s Upgrade and Investment Plans” for the full story.

“Put simply, the cost of building a second network is so high that its builder simply can’t earn a passable return based on the market share available to a second player,” Craig Moffett, an important telecom industry analyst working on behalf of Wall Street investors, argued over Verizon’s fiber to the home project dubbed FiOS. “Virtually every overbuilder, from telephone companies to competitive cable companies to municipalities, has learned this lesson the hard way; almost all such efforts have ended in bankruptcy. Verizon’s own FiOS network was an economic failure; there is no longer any debate about whether FiOS did or didn’t earn its cost of capital. It didn’t, and it wasn’t even close.”

Moffett’s philosophy about emerging broadband technology and competition is heavily influenced by his personal and professional belief that broadband competition is bad for business and investors. His distaste for Verizon FiOS, a plan to scrap old copper phone wiring in favor of fiber optics, was well-known across the industry and trade press. But Verizon kept going with the project under the leadership of then-CEO Ivan Seidenberg, who was a telephone man through and through. But by 2010, Seidenberg had decided to retire, and his successor, Lowell McAdam, had a very different perspective about Verizon’s future. McAdam spent almost his entire career from the early 1990s forward in the wireless business. In 2006, McAdam was named the chief operating officer and CEO of Verizon Wireless. When he succeeded Seidenberg in late 2010, Verizon had already announced it was winding down further FiOS expansion. That seemed to suit McAdam just fine, because under his leadership as CEO of Verizon, Verizon Wireless became the dominant focus of the company. Heavy investment in wireless continued, while Verizon’s landline network was allowed to deteriorate.

Moffett told his clients the end of FiOS expansion would be good news for cable companies because they would lose fewer subscribers as a result.

Verizon’s marketing machine carefully lays its business case for 5G home broadband

More than a decade later, Verizon’s decision to embark on another major technology upgrade requiring billions in new spending quickly raised eyebrows on Wall Street. This time, however, Verizon executives attempted to be better prepared to defend their 5G vision from the reflexive investor argument that it was too expensive and extravagant.

Moffett

“First, their fixed wireless broadband business will leverage investments that Verizon argues they will need to make anyway to support their wireless network,” Moffett wrote in a report to his clients, acknowledging Verizon’s claimed reasons for entering the wireless home broadband business. “Second, Verizon argues that it will be cheaper to connect homes wirelessly than it is to connect them with fiber, making it economic to deploy fixed wireless in markets where fiber to the home hasn’t been economically justifiable.”

Most of the expenses cited by Moffett relate to bringing fiber networks into neighborhoods to support the small cell technology Verizon is relying on for its 5G home broadband and mobile services.

Moffett also believes the only attractive market for 5G service will be in more upscale suburban rings around cities, not densely populated urban centers or rural areas. Moffett argues fiber providers are likely already providing service in urban areas and rural areas simply lack enough customers to justify the cost of either a fiber optic network or a small cell network. Ironically, that conclusion means the same suburban ring Moffett rejected 5-10 years ago as economically unsuitable for fiber service is now precisely the area Moffett argues is the only attractive market for fiber service, to bring 5G.

From a short-term results perspective, laying fiber optics is a costly proposition unlikely to return much revenue gain in a few short years. That reality has kept many investor-owned phone companies away from expensive network upgrades. These legacy telephone companies recognize they are going to continue to lose customers to faster technologies like cable, fiber, and perhaps, wireless. But managing an existing low-speed DSL business seems preferable to facing the wrath of investors upset over the prospect of shareholder dividends and share buybacks being curtailed to redirect money into a full-scale upgrade effort, even if it results in better returns and greater revenue a few years down the road.

Verizon is depending on its wireless division’s extremely high profitability to counter the usual objections to major upgrades, and by focusing on how 5G will enhance the wireless experience. It also benefits from media hype surrounding 5G technology, exciting some investors. But Verizon is also downplaying exactly what it will cost to lay fiber optic networks deep into neighborhoods to deliver it.

Moffett investigates Verizon’s first 5G city — Sacramento, Calif., and discovers alarming results

Moffett decided to bypass the traditional cost-benefit analysis of laying mile after mile of optical fiber and decided to test Verizon’s case for wireless 5G home broadband instead.

Six months after launch, Moffett investigated Verizon’s 5G millimeter wave network in Sacramento, examining how the service is initially performing. Moffett identified seven zip codes in Sacramento where service was most likely to be available, based on cell tower/small cell records. As of late February, Moffett found Sacramento had 391 Verizon small cells installed, with 273 used for millimeter wave 5G service (the rest are likely designed to bolster Verizon’s 4G LTE network).

Verizon has admitted small cell technology is vulnerable to distance, so Moffett relied on earlier purported claims of 5G coverage to limit the number of addresses to be sampled. Moffett’s team identified 45,000 out of 70,000 possible addresses, based on if those homes were located within a radius of 0.7 miles of a 5G small cell. Then, Moffett’s team devised a method of hitting Verizon’s 5G availability website with each of those 45,000 addresses to learn which ones Verizon qualified for 5G service.

The results, so far, are underwhelming:

• Only an average of 6% of the queried addresses were actually eligible to receive Verizon’s fixed wireless service. That could mean Verizon has installed 5G small cells, but some are not yet operational in all areas or the network is performing much worse than originally anticipated. Some zip codes did better than others, but not by much. The best offered just an 18% pre-qualified acceptance rate. Apparently Verizon’s qualification website also informs applicants if they already have service, which proved to be a good way of finding out how many addresses actually have signed up. Moffett claims only 3% of eligible customers have decided to subscribe to Verizon’s 5G home broadband service so far.
• Coverage appears to a problem. As Moffett checked addresses further away from each small cell, more and more were deemed ineligible for service. In fact, despite Verizon’s claims that its 5G signal reached customers more than 1,900 feet away, the company’s own website refused to actually sell service to customers that far away. Moffett found subscribers were deemed ineligible for service as little as 400 feet away from a small cell. At that distance, less than 50% of checked addresses could sign up. For those 700 feet or more away, almost no addresses were qualified for service.

With those results, Moffett was able to extrapolate some important numbers about how much Verizon’s infrastructure is being utilized:

• Each small cell serves approximately 27 eligible addresses.
• Verizon’s 5G home broadband has a 0.1% market share in Sacramento.
• Excluding areas where multi-dwelling properties dominate, Verizon has achieved a penetration of roughly one subscribed single-family home per 1.5 5G small cell.

“Our findings in Sacramento — limited coverage, low penetration — preliminary though they may be, suggest that earning an attractive return will be challenging, at best,” Moffett concluded.

Because Verizon has attracted so few subscribers thus far, the total cost per connected home for 5G wireless service could far exceed what it would cost to just lay down fiber to the home service to each customer, which might actually give Verizon more business.

“Our analysis suggests that costs will likely be much higher (that is, cell radii appear smaller) and penetration rates lower than initially expected,” the report explained. “If those patterns are indicative of what is to come in a broader rollout, it would mean a much higher cost per connected home, and therefore much lower returns on capital, than what might have been expected from Verizon’s advance billing.”

If Moffett’s estimate of 27 residences served per small cell was proven true, Verizon would have to deploy well over five million small cells to deliver 5G wireless service across America.

Verizon’s choice of cities to launch its 5G millimeter wave network may be partly designed to test the differences in topology, building density and foliage levels, and there may be dramatic differences between Houston, Sacramento, Indianapolis, and Los Angeles.

Moffett’s overall conclusion is that should Verizon move forward on rolling out 5G wireless home broadband to around 25% of the country, as it planned, reaching those 30 million homes “will take a very, very long time, and it will cost a great deal of money.”

Investors are not buying into the substantial hype surrounding the forthcoming 5G revolution and many remain unconvinced about the benefits of spending billions of investor dollars to deploy the next generation in wireless.

A survey by telecom analyst McKinsey & Co., picked up a clear drag on proposed spending, especially outside of North America, as carriers are finding investors reluctant about the business case for 5G technology.

The survey found 60% of wireless operators cited selling investors on the merits of 5G to be their greatest challenge. Only 25% were confident they could successfully prove a substantial return on investment for shareholders who typically want short-term results. Investors are demanding detailed evidence that 5G networks, the most costly requiring large fiber optic networks and neighborhood small cell antennas, will pay off with increased revenue and customer demand. Unlike earlier cellular standards which required incremental upgrades usually on existing cell towers, the fastest iteration of 5G will require providers to construct costly new fiber networks with a very large number of short-range antennas expected to be placed on top of utility or light poles.

Customer demand for 5G is anticipated to be low until new devices are introduced capable of connecting to it, and investors already recognize consumers are increasingly delaying device upgrades since the industry dropped two-year service contracts with device subsidies. Ongoing upgrades to existing 4G LTE networks may ultimately dampen demand even for less costly 5G networks that will be deployed on existing cell towers. McKinsey’s survey found less than 35% of respondents are planning quick launches of 5G on gigabit-speed capable millimeter wave spectrum, citing the high cost of deploying small cell networks.

“Until th[e business case emerges], most operators will tread cautiously, leveraging 5G for near-term objectives and waiting for a clearer view on the use cases’ economics to accelerate,” the McKinsey report concluded. “Given the expense required to prove those significant use cases, it could be an uncomfortably long wait. And for operators in countries that don’t see 5G as a matter of strategic and economic importance, there is a greater risk of falling behind.”

In early 2019, most network operators will focus on network planning and funding, with the first significant wave of launches expected in the U.S. coming later this year. Just over half of U.S. operators plan to have “large-scale 5G deployments” completed by late this year, and U.S. carriers are the most optimistic 5G can make good business sense, at least for some applications. Other U.S. carriers expect their networks to launch by the end of 2022. But in neither case are those launches expected to be widespread across the country. Competing with cable and phone company internet with fixed wireless service is also a non-priority for most operators.

“At least at the outset, the majority see enhanced mobile broadband and the Internet of Things (IoT), rather than fixed wireless access or mission-critical applications, as the most prevalent applications,” McKinsey’s survey found. Among early potential applications are smart utility meter connectivity, traffic sensing, and connected public infrastructure like lighting and traffic control signals. Giving consumers a way out of choosing between Verizon and Comcast for home internet service is not going to be an early priority for companies like AT&T. In fact, starting a price war is the last thing investors want to see.

“Although commercially in its infancy, 5G technology is ready, and in most markets its presence will be felt from 2020 on,” McKinsey’s report states. “Yet the fact that commercial models are not ready cannot be minimized; the business case is marginal, and the investments to enable new business models are not currently planned.”

McKinsey believes what will ultimately drive a gradual rollout of 5G technology is network congestion which can no longer be managed through existing traditional cell tower networks, known as “macro sites.”

“In rural and suburban areas, as well as along roadways, operators can handle increased traffic simply by densifying existing networks with macro sites,” McKinsey shared. “In many highly populated urban areas, by contrast, they’ll need to rely on small-cell solutions for two reasons: a higher concentration of traffic, as measured by traffic load per square kilometer, and the use of higher spectrum bands (greater than 3 gigahertz).”

But making the jump from the traditional large cell tower to a network of small cells scattered around neighborhoods will require a great deal of money. Operators will need to build fiber optic connectivity to each small cell, which can be managed either with a newly constructed fiber project or leasing existing fiber optic networks, presumably from cable operators which already have a significant fiber presence. In either scenario, rural areas will largely be left out, because all-important network traffic density is generally inadequate to support the business case for 5G, and cable operators are unlikely to have fiber networks available to lease in those areas.