Cable's Future Network Will be Flatter

U.S. Consumer Broadband Speeds Double Every Four Years, Prices Down 23%

Despite arguments by many observers that U.S. fixed-line broadband access services are not competitive, it is a curiously "uncompetitive" market where speeds double every four years, for more than a decade, growing 20 percent a year over the last 13 or so years.

Prices are a harder thing to measure, given the changes in the basic product over time. In other words, what a consumer pays today for a broadband connection is not an "apples to apples" comparison, given the doubling of speed every four years. The "product" a consumer can buy today, for any nominal price, is a different product than was purchased four, eight or 12 years ago.

Nevertheless, the American Consumer Institute notes that, between 2004 and 20009 alone, Internet access pricing declined 23 percent.

Another academic study suggests cable modem prices grew 0.8 percent, while digital subscriber line prices grew five percent, between 2004 and 2009. At the same time, cable modem speeds increased 85 percent while DSL speeds increased 80 percent, that same study found.

On a cents-per-bit basis, cable modem prices declined 45 percent, while DSL cost dropped 42 percent. Over that same period of time, the consumer price index grew 14 percent.

Fuel prices increased 26 percent, food increased 15 percent, housing increased 13 percent, medical care prices increased 21 percent and education increased 32 percent.

It is a strange "uncompetitive" market indeed that has doubled "quality" (speeds) every four years while prices overall have declined 23 percent.

Some observers have suggested that the Google-Verizon agreement on how to handle network neutrality is a concession by Verizon that fixed-line broadband actually is "uncompetitive," or at least not as competitive as wireless broadband is. Some observers might argue that Verizon has conceded nothing of the kind.

The FCC study, one might argue, suggests that despite the apparent lack of competition in the fixed-line broadband market, the data suggest consumers are indeed reaping the benefits of competition.

100 Mbps "Can't be Done"

I learned long ago that when somebody says something "can't be done," it is best to understand that claim as "I can't do it." I think we also have learned that even when somebody says something can be done, they might mean "it can be done so long as not that many people want to do it."

And that might be the case as cable operators prep broadband access services capable of running at speeds as high as 250 Mbps, at least so long as most people do not desire to buy services running at such speeds.

Broadband Reports says cable operators will start talking about a 250 Mbps service sopmetime later this year, though nobody will be able to buy it. Comcast also says it will be offering 100-Mbps service to about 25 percent of its potential customers by the end of 2010.

Comcast should be congratulated for that move, though it is not clear what might happen if lots of people actually bought it.  The rub is that providing 250 Mbps requires bonding of about eight standard 6-MHz channels.

The issue there is the same problem satellite operators have when providing downstream bandwidth. There are finite numbers of channels available, so cannibalizing bandwidth for data services reduces the amount of bandwidth available for video services.

The point is that some providers--particularly cable operators--will be able to claim speeds of at least 100 Mbps, at least in terms of what is commercially feasible at low penetration. it isn't clear any network can support 100 Mbps at high penetration, at least not at prices in two, rather than three digits.

Still, it is a reminder that when somebody says something "can't be done," one has to consider the source. Just because one company can't do it does not mean all companies cannot do it.

The other relevant observation is that "hero" devices and services are feasible. What is not clear is whether "mass market" availability is possible.

http://www.dslreports.com/shownews/Comcast-Exploring-250-Mbps-Service-107002

Is This Evidence of Declining Use of At-Home Broadband?

If one looks at the quarterly or annual data on broadband subscriptions during the course of the recent recession, one is hard pressed to find any significant evidence that broadband users downgraded their connections to dial-up or stopped using the Internet.

This data from the Pew Internet & American Life Project, on the other hand, shows leveling in 2009, about a year into the recession, and an actual decline late in 2009.

Some might note that a three-percentage point swing in reported behavior on this sort of survey would be within the margin of error, so it is hard to infer anything conclusively. But even a flattening would be significant, should the trend be later confirmed.

Broadband access at home has not yet ever declined. Virtually all the public firms have reported continual net customer additions, so any slowdowns or reversals might have occurred at private or smaller providers. We'll have to watch this.

Few Takers for 50 Mbps Access

Time Warner Cable has about nine million high-speed access customers. It has about 20,000 customers for its fastest DOCSIS 3.0 service, which depending on configuration can support speeds up to about 43 Mbps per 6 MHz channel in the downstream direction, or more, if more bandwidth is made available.

All that means is that few customers are willing to pay $100 a month or more to get really-fast broadband access running at speeds of about 50 Mbps maximum.

Despite the Noise, Broadband Subscribers are Highly Satisfied

Judging by some commentary one hears on the Internet and blogosphere, customers are very unhappy with their broadband access services.

After all, isn't the United States woefully behind other nations in speeds?

A new study by Parks Associates shows the opposite. The overwhelming percentage of U.S. broadband customers, across every single platform are "highly satisfied."

There is, to be sure, a small percentage of users on every type of access network who say they are "highly dissatisfied" with their service. The shock might be how few actually are really unhappy.

Granted, continual improvement is a good thing. But the Parks Associates study suggests providers need to keep improving a service that provides overwhelming "high" satisfaction, rather than scrambling to update services that basically are seen as somehow inadequate.

Rural-Urban Broadband Customers Not so Different

Are rural broadband customers all that different from suburban or urban customers? Not so much, a new analysis by Parks Associations suggests.

The percentages of rural broadband households who are very satisfied and very dissatisfied with their broadband services are within the margin of error for all U.S. broadband households, Parks Asociates notes. In other words, they are no more inclined to be pleased or upset with their service and service provider.

Rural broadband consumers desire value-added services on par with all U.S. broadband households, with premium technical support services and online backup as the top-two desired value-added services.

And the overwhelming percentage of U.S. broadband consumers are highly satisfied with their access services, despite a small percentage that say they are highly dissatisfied.

Overall, the rural status of a household has little impact on level of satisfaction with its broadband service. The type of access service does seem to have some bearing on high and low satisfaction.

Households with fiber broadband services report high satisfaction ratings in larger numbers, and households receiving satellite and wireless broadband services exhibit lower satisfaction ratings. But there is an important caveat. Customers who buy bundles of service are happier than customers who do not buy bundles. So the key variable seems to be the ability to buy a bundle, more than the type fo access.

The business implications would seem to be clear enough. Bundles create higher satisfaction and higher satisfaction reduces churn.  A highly satisfied broadband subscriber is 46 percent less likely to churn from a current provider, whereas a highly dissatisfied customer is 384 percent more likely to leave a current broadband provider.

A subscriber to a triple play of access services (broadband, television, and home telephone)
 is 15 percent more likely to be a highly satisfied broadband customer.

More than 70 percent of cable broadband households subscribe to a bundle, about 25 percent of which buy a triple play. But most, about 66 percent, buy a dual-play bundle of video and broadband access.

DSL providers have 58 percent bundle penetration, with 25 percent of customers opting for a dual-play package of  broadband and video while 17 percent buy a triple-play bundle.

Fiber broadband providers have 78 percent bundle penetration, with 64 percent buying a dual-play broadband and video bundle and 49 percent buying a triple-play package.

Rural broadband customers are 10 percent to 20 percent less likely than broadband subscribers on a national level to subscribe to the most-common broadband bundles. One would therefore expect lower satisfaction in rural areas, since satisfaction and bundles seem to be directly related.

64% of U.S. Broadband Connections Now are Mobile

There are more mobile broadband subscriptions in service in the U.S. market than fixed line.

The CTIA notes that there are now 103 million mobile broadband customers in the United States, according to Informa Telecom and Media. There are more than 58 million fixed line subscribers, according to Insight Research Corp.

By that measure, there are 161 million U.S. broadband subscriptions. So mobile connections represent 64 percent of broadband connections now in use. And mobile broadband has exploded over the last 18 months.

In June 2008, mobile broadband accounted for more than 59 million high speed subscribers, about 45 percent of all broadband connection in the United States, according to the Federal Communications Commission.

Clearly, any effort to create a national U.S. broadband policy would have to recognize the leading role wireless now plays.

Broadband Users Generally Satisfied

U.S. consumers generally seem to be aware of the importance of bandwidth as a determinant of their Internet experiences, says Mike Paxton, In-Stat analyst. For the most part, they also seem satisfied with their current access speeds.

Anecdotal evidence suggests many consumers are aware there is a difference between theoretical bandwidth and the actual bandwidth they get when lots of other users are on the network at the same time.

For that reason, consumers increasingly are receptive to higher-bandwidth offers, In-Stat argues. Most consumers probably are not aware that, at peak load, the average bandwidth they may be able to use is as much as an order of magnitude less than the theoretical bandwidth.

That said, more than 83 percent of respondents to a recent In-Stat consumer survey, which included a speed measurement, said they either were "very satisfied" or "somewhat satisfied" with their current connection.

In large part, that finding is testament to generally enhanced access speed offerings by virtually all suppliers.

The survey of 700 users found an average downstream speed of 3.8 Mbps, while the average upstream speed is 980 kbps.

The average downstream fiber-to-home speed was 8.8 Mbps, while cable modem connections averaged 4.9 Mbps and DSL averaged 2.1 Mbps, In-Stat says. Those findings are generally congruent with research published by the Communications Workers of America in 2007.

The average monthly price for broadband service is a bit over $38.

FTTH is inevitable

No matter what posturing now occurs, cable operators and at&t someday will switch access platforms and adopt fiber-to-home as the standard wired access approach. For the sake of pleasing investors, who seem to hate investments in FTTH that are the only long-term hope for any wired access provider, lots of companies insist they do not presently need to do so, and they arguably are correct.

Other small independent providers in very-rural areas likewise will insist they cannot afford FTTH. That ultimately will be resolved either by new forms of rural or high-cost area subsidies, or by some new hybrid delivery platform using fixed wireless as the tail circuit.

None of that is relevant. Demand continues to increase, and at some point, the only sane choice for a fixed network that has to deliver a minimum of 100 Mbps worth of data bandwidth, not to mention video, is FTTH.

We might be four to eight years away from that point. The precise timing, though, isn't so important. No matter what executives may now believe, they ultimately will have to scrap hybrid fiber coax and fiber to the node, for competitive reasons. When wireless broadband starts to offer anything close to that sort of bandwidth, no wired network is going to be able to avoid upgrading.

That doesn't mean it is sound business practice to deploy platforms of such bandwidth today, in the mass market. The ramp up frankly is best handled on a gradual basis, as local competitive conditions dictate, to conserve capital for a time when the move is unavoidable, under conditions where there is little incremental revenue to be gotten.

But that won't always be the case. One way or another, service providers are going to discover and then create funding mechanisms that make FTTH a rational choice. Just because we can't predict in precise detail what those mechanisms will be is not the issue. Neither could cable industry executives have rationally explained in detail what all the new demand for video choices would be if capacity were upgraded.

Nor could wireless executives, 10 years ago, have presented a clear and compelling line of argument about why text messaging, email or ringtones or music would be generating significant or growing amounts of revenue.

Though there now is an investor revulsion to financing "build it and they will come schemes," in fact that precisely is the history of innovation in the communications and entertainment business. When given choices, developers have responded and consumers have bought.

That doesn't mean every new application, or even most, are going to succeed in the mass market. The point is that we never are very good at figuring out what developers will dream up, and what consumers will flock to.

It is clear that supply creates its own demand, ultimately.

50 Mbps from Comcast by 2010?

Comcast will offer customers 50 megabit-per-second service, upstream and downstream, available to half its subscribers and homes passed, by 2010, DSLPrime's Dave Burstein argues. What remains unclear is how many customers Comcast or any other cable company will be able to support at those rates, in any single neighborhood of 500 homes or so, unless a very large amount of analog video bandwidth is freed up by moving them to the digital service tiers.

VoIP, Broadband Growth is Slowing

One of the tentative conclusions we might reach from Comcast's fourth-quarter results is that the broadband access market is approaching a saturation point, with slowing net additions. Comcast added about 331,000 broadband subscribers in the three months ending Dec. 31, 2007, down 26 percent from the 450,000 subscribers it added in the third quarter. That's congruent with net adds from telcos as well, and has perhaps a little to do with the economy and slower housing starts. But mostly it is simply that we are approaching the point where nearly every potential customer for broadband already has become one.

VoIP net adds are slowing as well, again confirming a broader trend seen in the consuemr segment of the VoIP business overall. Basically, significant numbers of people who are persuaded VoIP makes sense for them right now have become customers.

After adding 662,000 new subscribers in the third quarter, Comcast’s total net new voice additions dropped to 604,000 in the fourth quarter. None of this is unexpected.

Broadband Adoption: Under Par for the Course

Since broadband first became widely available to consumers in the late 1990s, adoption has hit the
halfway point faster than most other information and communication technologies.

It took 18 years for the personal computer to be used by 50 percent of Americans at home and 18 years for color TV to reach half of homes.

Mobile phone penetration took 15 years to reach the "half of homes" point. It took 14 years for the video cassette recorder, and 10 and one half years for the compact disc player to reach the same level of penetration.

It has taken about 10 years for broadband to reach 50 percent of homes. We can argue about the price of broadband, the definition of broadband, the quality or terms of service under which broadband can be purchased.

But it continues to surprise me that some observers still think there is some sort of crisis or problem here. Over the last year bandwidths have been leaping, not just incrementally increasing. There's more third generation wireless access, more WiMAX, more Wi-Fi. With a new SpaceWay satellite in orbit, there's much more satellite broadband capacity coming online as well.

And the last time I checked, some 98 percent of U.S. homes had access to at least one wireline broadband provider, and depending on where the location is, one or two satellite providers. Again, depending on location, users have access to one to three broadband mobile networks as well.

Few countries save Japan have prices-per-megabit lower than U.S. consumers do. By all means let us solve problems. But it doesn't do much good to keep trying to "solve" problems that already are in the process of being fixed.

And by any historical standard broadband access is a product being adopted by U.S. consumers at a faster rate than other highly-popular innovations have. In fact, one would be hard pressed to name another popular innovation that has penetrated the market so quickly.

More Trouble for Cable?

Once upon a time, the cable TV industry was a struggling insurgent industry, long on hope, short on finding, basically a rural market service retransmitting urban market off-air signals to areas that couldn't receive them.

All that changed during the 1980s when major metro markets were wired, channel capacities grew into scores and independent programmers changed the business from "remote channel importation" to an "add choice" model.

By the 1990s cable gradually captured 70 percent of homes. Over the last 19 years, as video penetration saturated, cable modem and voice services emerged as the growth drivers. But cable now is an incumbent. Like the telephone companies, it faces negative growth in its legacy business, partly from satellite providers but increasingly from at&t and Verizon.

As a result, cable stocks have dropped about 35 percent since last summer. UBS analyst John Hodluk thinks more pain is coming, as consumer spending slows, broadband access additions decelerate and the telcos start to make themselves felt in video service.

Hodulik says the two telcos will double the reach of their video services this year to about 18 percent of homes passed, and will double again by the end of 2010. As a result, cable basic sub losses could triple in 2008.

On the other hand, Qwest Communications might lose nearly 10 percent of its consumer lines this year as well.

The good news for most telcos is that revenue sources have diversified quite a lot over the past decade. Consider Cincinnati Bell, an independent telco.

About 83 percent of its service revenue in 2007 was earned from areas other than the traditional consumer wireline voice traffic. In 2006, Cincinnati Bell earned about 80 percent of its total revenue from sources other than consumer landlines.

Business market revenue is part of the reason. Revenue from data center managed services increased 43 percent in 2007, for example. Wireless service revenue from business customers grew by 17 percent and business access lines were actually up almost two percent. As a reflection of this growth business markets revenue represent a 57 percent of total 2007 revenue compared with 55 percent in 2006.

Which is largely what the Federal Communications Commission forecast would happen when it decided the basic competitive framework for the U.S. market would be to encourage the telcos and cable companies to have at it. That hasn't been helpful for other would-be competitors, including competitive local exchange carriers and independent VoIP providers.

But there's reason to believe the framework is working, at least to a significant extent. A great deal of the credit, though, is because of the contributions made by Internet-based application providers. That payoff seems clearer every day.

Is FiOS a Different Product?

Verizon says it has 8.2 million broadband access subscribers. During the fourth quarter, Verizon added 245,000 net new FiOS Internet customers and 19,000 net DSL subscribers. So here's the question: is T1 (1.54 Mbps) a different product from a DS3 (45 Mbps) connection? Is T1 a different product from an asymmetrical cable modem or Digital Subscriber Line service? I suspect most people who create and deliver such services would say "yes."

So if a customer buys a FiOS fiber to home service, is that a different product than the alternative it replaces? If Verizon added just 19,000 DSL subs and an order of magnitude more FiOS subs, what does that suggest? Right now it is hard to tell what it means, as Verizon does not appear to be providing detail on DSL penetration as distinct from FiOS Internet.

So far, Verizon says it has 21 percent FiOS Internet penetration where it can sell the service.
Presumably that includes virtually all of the DSL subs who converted over to FiOS. At the end of March 2007 Verizon said it had overall broadband penetration of about 16.8 percent.

So it is conceivable that FiOS availability boosts broadband access penetration by something slightly less than four percent of marketable homes, as well as garnering 16 percent of homes as video subscribers.

For the moment, FiOS Internet appears largely to be a substitute for DSL. That should change over time, as nearly all major market consumers in Verizon's footprint have a chance to buy Ethernet services ranging from 10 to 50 Mbps. It's hard to imagine that not emerging as a differentiated product.

New Verizon FiOS Offers Will Cannibalize Data T1s

Verizon now is selling symmetrical FiOS connections aimed at small and mid-sized businesses at speeds of up to 20 Mbps as well as 50 Mbps downstream with a 20 Mbps upstream. The new offerings will put pressure on data T1 sales, but not necessarily integrated T1s used to support both data and voice, in all likelihood.

In some states (Connecticut, Florida, Massachusetts, New Jersey, New York and Rhode Island) small- and medium-sized business customers can subscribe to 20M/20M service with a dynamic IP address for $99.99 per month; or with a static IP address, the 20M/20M service is $139.99 per month -- both with a two-year term agreement.

The fastest speed available in these states is now 50M/20M for $199.99 per month with a dynamic IP address, or $239.99 per month with a static IP address -- both with a two-year term agreement.

In other states (California, Delaware, Indiana, Maryland, Maine, New Hampshire, Oregon, Pennsylvania, South Carolina, Texas, Virginia and
Washington) small- and medium-sized business customers can subscribe to 15M/15M service with a dynamic IP address for $99.99 per month, or with a
static IP address, the 15M/15M service is $139.99 per month both with a two-year term agreement.

The fastest speed available -- 35M/5M with a dynamic IP address -- has been increased to 30M/15M for $199.99 per month, or $239.99 per month with a static IP address both with a two-year term agreement.

The plans are also available with 12-month agreements at higher prices.

Along with the introduction of FiOS Internet service at symmetrical speeds of 20 Mbps or 15 Mbps, the company has also increased the speed on its fastest business Internet plans and lowered prices by as much as 35 percent.

Verizon FiOS Internet Service for Business allows business owners to choose either a dynamic Internet protocol (IP) address or a static IP address.

FiOS Internet service for small businesses is available as part of a bundle including local and long-distance calling services from Verizon, or as
a stand-alone Internet access service.

Fuzzy Thinking on Network Neutrality

With the caveat that "network neutrality" means different things to different people, it is striking that some observers think bandwidth caps for excessive use have anything whatsoever to do with network neutrality.

That's a little like arguing bigger or smaller buckets of mobile voice or text usage constitute some sort of "neutrality" issue. It's a business issue, nothing more.

The discussion is sparked by news that Time Warner is testing usage-based pricing for broadband access in a few markets, for new customers. The idea undoubtedly is that the new plans will be price neutral for 95 percent of customers, and affect only "extreme" downloaders or really-heavy peer to peer customers.

Once the test starts, new customers will be offered a choice of four plans that allow them to download set amounts each month--5, 10, 20 or 40 gigabytes. The typical user now consumes something on the order of three gigabytes a month.

Time of Day Pricing

As exemplified by this chart showing how utilities price usage by time to day to discourage use during periods of peak load, one theoretically could price broadband access, voice or virtually any other communications good based on time of day or day of week. Long distance pricing used to do so, in fact.

Of course, what we now know is that users vastly prefer flat rates, often because it is a way to avoid steep "overage" charges, and even when the actual price for usage is much higher than one might think. Based on what one did in a single billing period, for example, average prices for wireless calling might range from two cents a minute to eight cents or more. When one is on vacation, per-minute pricing might be as high as 20 to 25 cents a minute for the actual minutes used.

Most U.S. consumers probably don't worry about "per minute" pricing for domestic calling. They pay a flat rate for a certain number of minutes in a bucket, and that's about as far as one normally thinks about the matter.

Not so long ago, though, wireless calling and wired network calling routinely used time of day pricing. In principle, broadband access could be priced the same way. It is doubtful the potential benefits are worth the effort. Customers clearly prefer buckets and flat rate pricing. Also, there are costs associated with tracking usage so closely, so in most cases it might not be worth the effort.

The other issue is that pricing by the value of an application makes more sense than tracking raw bandwidth usage. The value of a text message or voice bit is quite high on a price-per-bit basis. On the other hand, the value of high-quality video video or audio bits is not determined so much by price-per-bit as by quality of the streams.

One movie might be "worth" the $3 or $4 a user pays for the stream. But the value will be determined by the quality of the delivered images. Two hours of continuous talking might be valued just as highly, even if the perceived price is $2.40 (two cents a minute for 120 minutes).

Time of day pricing also arguably makes less sense for broadband because network load tends to balance out, if one includes business broadband and consumer broadband load. Business load is high from 8 a.m. until perhaps 4 p.m. while consumer usage peaks in the evening. Average load therefore tends to balance on any given network from 8 a.m. to 11 p.m. local time, though usage obviously is lighter from midnight to 6 a.m.

Usage-Based Pricing Not Unusual

At some point, as more Internet service providers begin to adopt "buckets" of use as the dominant subscription model, there will be outcries about whether this is fair, since most users in the U.S. market have come to expect flat fee pricing for "unlimited" use.

That has not been the dominant model in Europe, for example, and though there might be some incremental impact in usage patterns, I don't think anybody would argue that metered usage is terribly and inherently unfriendly.

It also is highly unlikely to the point of implausibility that ISPs in the U.S. market will move to a strict metered usage regime. The reason is simply that the objective--matching consumption to the cost of providing access--can be addressed more simply and palatably by using the "bucket" model, much as mobile calling or texting plans can be purchased based on expected usage.

In that regard, it might be helpful to recall that consumer pricing has used any number of models. Pay-as-you-go had been the dominant packaging and pricing model for all long distance plans, mobile and fixed, until at&t introduced "Digital One Rate." Local calling, on the other hand, has used a "fixed fee, all you can eat" model.

Cable TV has used a mixed model: essentially "flat fee, all you can eat" for ad-supported video and movie channels, but usage-based pricing for on-demand pricing.

The model used for Internet access started at the other end of the continuum: unlimited use (subject to some acceptable use policies) for a flat fee. Only recently have some voice providers moved to that model.

Of late, though, there has been a bigger move to "buckets" that match usage to price. There's no particular reason to believe a move in that direction will affect the vast majority of users. Most customers have usage patterns that fall within a reasonable zone, and won't, in practice, notice anything different even if usage-based pricing becomes more prevalent.

Providers obviously will want to minimize disruption, and there's no question but that lower prices have driven high demand. Nobody will want to jeopardize their market share by raising prices for most customers other than the small percentage who consume a disproportionate share of bandwidth.

Over time, more attention will have to be paid to the relationship between retail pricing and usage as video starts to change usage patterns, though.

FiOS Best, Says Consumer Reports

The February issue of Consumer Reports features a survey of broadband access providers, and names the Verizon FiOS service, best for reliability and performance for its Internet, television, and telephone services.

Better cable companies include Cox, Bright House and Wow, the survey indicates.

For Internet service offered through a cable company, Wow, Cincinnati Bell and Bright House also did well in the survey. Verizon's DSL Internet service was rated "average" for value, reliability and support, but scores for performance were lagging, according to Consumer Reports.