More Fixed Network ISP Competition Seems to be Coming

The fixed network internet access duopoly possibly is going to be challenged in new ways over the coming decade. New forms of mobile competition are going to develop, including both direct mobile substitution and mobile-enabled fixed wireless. Also, some new fixed network competitors are likely to enter the markets as well.

At least in principle, more than 100 Colorado communities could see some form of

municipal broadband network created, as voters in those communities have approved such moves. That clears a legal hurdle, but now means each community will grapple with the business model.

Longmont, Colo. already has built out a portion of its planned gigabit internet access network, aided by that city’s ownership of a municipal power utility, meaning Longmont owns rights of way, distribution facilities, rolling stock and other assets helpful to creating a city-wide internet access network.

In Centennial, Colo., private internet service provider Ting Internet will piggyback on a new government network to be built by the city of Centennial itself.    

In a few cases, state funds could play a role, as subsidies for middle-mile trunking can change the business model. Magellan Advisors, for example, identifies several roles cities can take, including streamlining of processing necessary for private ISPs to build or upgrade infrastructure; providing access to city-owned dark fiber; city-owned wholesale capacity services or actual provisioning of municipal services for businesses or consumers.

Risk and capital investment grows assume more active roles, including that of actual service  provider. One point worth making is that adoption rates vary based on the number of services offered, and by the ways adoption is measured.

These days, in competitive consumer markets, penetration is measured in terms of revenue-generating units, not “locations” or “households.” Each unit sold (voice, video or internet access) is counted against the base of locations. So a single location buying three services results counts as much as three other homes buying just one service.

So it is that a number of retail service providers such as Morristown, Tenn.; Chattanooga, Tenn.; Bristol, Va. or Cedar Falls, Iowa seem to have far higher penetration rates than Longmont, Colo.

That is partly because the Longmont network still is being built out, but also reflects the fact that Longmont’s network sells only internet access and voice, but not video entertainment services. The other networks have been in operation and marketing for three times as many years as Longmont.

source: Magellan Advisors

Customer “penetration” by household therefore is different from penetration measured as a function of units sold. The difference is that determining the magnitude of stranded assets hinges on how many locations passed generate revenue.

Assume that, on average, a typical household buys 66 percent of the total suite of services (two of three triple play services or  three of five services, for example).

The difference is significant. Measuring “penetration” by units sold, penetration appears to be as high as 76 percent to 87 percent. Measured as a function of homes generating revenue, penetration could be as low as nine percent, or as high as 44 percent, with a “typical” value being something between 20 percent to 25 percent of homes passed.

Penetration: Units Sold or Homes Buying Service?
	Morristown	Chattanooga	Bristol	Cedar Falls	Longmont
homes passed	14500	140000	16800	15000	4000
subscribers	5600	70000	12700	13000	500
units sold	39%	50%	76%	87%	13%
services sold	3	3	5	3	2
HH buys .66 =	2	2	3	2	1
Homes served	2828	35354	3848	6566	379
penetration	20%	25%	23%	44%	9%

It might be worth pointing out that all these communities (Morristown, Chattanooga, Bristol, Cedar Falls and Longmont) have municipally-owned utility companies, and might therefore represent a sort of best case for retail operations serving consumers.

That seems consistent with other evidence. In markets where a telco and a cable operator are competent, as is the attacking ISP (municipal or private), market share might take a structure of 40-40-20 or so, possibly 50-30-20 in areas where the telco does not have the ability to invest in faster broadband and the cable operator has the largest share.

Beyond the actual cost of the network, and the business role chosen by the municipality, details of revenue generation (homes that generate revenue as a percentage of total; number of services offered) are fundamental.

Beyond that are the other operating and marketing costs, overhead and need for repaying borrowed funds and making interest payments, on the part of the retail service provider.

One might argue that most other communities, without the advantages ownership of an electric utility provides, will often find the lower risk of a shared public-private approach more appealing.

Also, some ISPs might find the availability of some amount of wholesale or shared infrastructure makes a meaningful difference in a business model.

One might suggest there are a couple of potential practical implications. Efforts by incumbent ISPs to raise retail prices in the same way that video entertainment prices have grown (far higher than the rate of overall inflation) will increase the odds new competitors enter a market.

Higher prices, in fact, will increase the likelihood of new entrants entering a market, as the higher prices increase the attractiveness of doing so.

In at least some cases, the new competitors will be firms such as Verizon, which now has announced it will essentially overbuild an AT&T and Comcast markets in Sacramento, Calif.

Though it is not easy, more competitive ISPs are likely to enter more markets, as lower-cost access platforms evolve, helped in some cases by municipal facilities support.

Where that happens, it is conceivable that the incumbents will see a new limitation on their market share, dipping from possibly 50-percent share to a maximum of perhaps 40 percent each, on a long-term basis, assuming the new competitor is not eventually bought out by one of the incumbents.

Fort Collins Colo. to Build Own Gigabit Network

The City of Fort Collins will build its own retail municipal broadband network. The city expects to build the entire network over three to four years.

Target residential pricing is  $50 per month for 50-Mbps service, and $70 per month for 1-Gbps service.

An “affordable Internet” tier also will be offered, the business plan says. The city expects to borrow between $130 million and $150 million to fund network construction and activation.

The city estimates a cost per passed home to be $984, with the cost to connect a customer location at about $600 each.

It is obvious that most of the customers will come from one of the two dominant providers, Comcast and CenturyLink, as more than 91 percent of households already buy a fixed network internet connection.

Comcast has about 57 percent market share, while CenturyLink has about 37 percent share, the city says.

Comcast already has launched gigabit services in Fort Collins, ahead of the municipal network launch.

City consultants estimate the new municipal network could get as much as 30 percent share of market. That is based, in large part, on experience. Other municipal networks have gotten share in about that range.

One caveat is that it is unclear how the other networks measure penetration. One way is to count by connected homes. The other method, where a network offers multiple services, is to count “units sold” and then divide by the number of households.

source: City of Fort Collins

In such cases, the actual number of connected homes is less than the penetration figures would suggest, as a single home, buying three services, generates three revenue units. When measuring penetration rates, that has the same impact as three homes buying one service.

So some of us would guess that the actual household penetration can range from less than 20 percent to perhaps 35 percent.

Much also will hinge on what Comcast and CenturyLink decide to do to hang on to existing customer accounts.

Comcast’s gigabit pricing originally was set at  $159.95 per month without a contract, and $110 per month with a one-year contract.

But few might predict Comcast is willing to lose huge chunks of market share rather than lower its prices to about $70 a month (or whatever level is needed to remain competitive with the municipal network).

Comcast has offered $70 a month pricing in other markets where it faces serious competition for gigabit internet access.

source: City of Fort Collins

Some idea of operating costs (exclusive of marketing) can be seen in estimates for personnel.

source: City of Fort Collins

The larger point is that more competition in the internet access space keeps coming, despite fears of a duopoly and limited consumer benefits. For most potential consumers, the real options are going to be mobile services, though, as 5G services are launched nationwide.

Comcast Expects 10-Gbps Downstream Upgrade to Cost "Less than $200 Per Passing"

Comcast says it can initially upgrade its network to eventually handle symmetrical 10-Gbps internet access (supporting 10 Gbps initially) for “less than $200 a home passed,” according to Elad Nafshi, Comcast EVP and chief network officer. 

It is a nuanced statement. 

That initial upgrade cost includes revamping networks from low-split to mid-split, including changes to active and passive network elements when necessary to support an upgrade to DOCSIS 4.0 10-Gbps downstream bandwidth. Upstream will increase to perhaps 1 Gbps. 

Significantly, Comcast’s initial deployment does not require full fiber distribution, but can accommodate as many as four amplifiers in cascade. 

That means the upgrade to 10-Gbps downstream service can be done without upgrading the whole network to fiber, which uses passive coaxial cable only for the last 100 feet or so of drop cable. 

Upgrading to symmetrical 10-Gbps service will require replacing all the radio frequency amplifiers. Typically, Comcast has built out fiber to an optical node, then delivered signals to home using a string (cascade) of up to four amplifiers running on coaxial cable. 

In the first stage of DOCSIS 4.0 deployment,  most of Comcast’s facilities can continue to operate with fiber distribution to a node, then retain as many as four RF  amplifiers for service to homes. There are huge cost implications for retaining that capability, since Comcast can continue to use the in-place amplifiers and coaxial cable. 

Future “Node + 0 amplifier” networks will transition to Full-Duplex (FDX) DOCSIS, to significantly increase the upstream bandwidth to multi-gigabit speeds, such as symmetrical 10-Gbps service. But that also will require deploying a full fiber network, using coaxial cable only for the drops. 

The first step will be a shift to a 5-MHz to 204-MHz upstream bandwidth and 1218 MHz downstream bandwidth, supporting a 1 Gbps upstream tier and multi-Gbps downstream. In the following illustration, blue frequencies are available for downstream traffic, while red frequencies are available for upstream traffic. 

As usual, the upgrades can be implemented incrementally, in stages, with incremental capital investment. . 

source: Comcast 

Then overlapping bidirectional spectrum from 108 to 204 MHz can be activated. that eventually increases up to the full 108-MHz  to 684-MHz FDX limit. In that implementation DOCSIS 3.0 can be supported up to the 1002 MHz limit and legacy DOCSIS 3.1 to the 1218-MHz limit.

The point is that Comcast still believes it can upgrade its bandwidth over time to symmetrical 10-Gbps service while remaining the low-cost provider compared to rival fiber-to-home networks.

More Competition Coming in U.S. Internet Access Market

To the extent that cable TV industry fortunes now rely on internet access revenues, and to the extent that new competition emerges from 5G fixed wireless, that growth engine is exposed.

“We see 5G fixed wireless broadband as the biggest existential threat to broadband providers (by far),” say equity analysts at Cowen. Assume, for example, that T-Mobile US actually throws significant effort at 5G fixed wireless, and gets anywhere near its goal of 10 million accounts by about 2024.

“That would be a large majority of the entire cable industry’s broadband adds over the next six years,” Cowen analysts say.

Verizon, for its part, is targeting 30 million or perhaps 35 million homes passed, in metro markets where it has lots of fiber (places where XO has big footprint, for example) and outside its legacy fixed network territory.

That suggests Verizon could wind up competing most with AT&T, Comcast and Charter. Making a further assumption that in its chosen markets it will be Comcast and Charter that have the most market share, and already have the greatest share of faster-speed accounts, that logicall suggests the cable competitors might be at more risk than AT&T or CenturyLink.

You might argue that the telcos generally sell lower-speed services, so their customers would be most at risk from a fixed wireless entry by Verizon or T-Mobile. But most of those customers already could have switched to cable providers, were internet access speed the big consideration.

What might be the case is that customers of slower-speed telco services think those services are good enough, when bundled with other telco services, to inhibit switching behavior.

source: Cowen

Verizon has significant metro fiber in 17 of the top “NFL” U.S. markets where it is not the incumbent.

Assuming the cable competitor in those markets has 45 percent share, IComcast could have 2.1 million homes exposed to loss, about (eight percent of its base).

Charter might be at risk to share loss of perhaps 1.1 million homes, about 4.7 percent of its base.

Assuming a 25 percent Verizon take rate when it enters those new markets, perhaps two percent of Comcast customers and one percent of Charter customers could go to Verizon. That might be a manageable loss.

T-Mobile US might take a different tack. T -Mobile expects to become a viable in -home broadband alternative especially in rural areas. The carrier believes it will, by 2021, it provide data rates in excess of 100 Mbps to 66 percent of the U.S. population, reaching coverage of up to 90 percent by 2024.

T-Mobile US execs have suggested that a service offering 100 Mbps would be a competitive alternative for perhaps 19 percent  of the population. By 2024, as much as 35 percent to 45 percent of the U.S. population might be candidates for a mobile substitute product.

Looking at fixed wireless, T-Mobile US estimates it could provide service to 9.5 million households early on. By 2024 T -Mobile expects to be able to reach 52 million rural residents with a fixed wireless solution.

source: Cowen

Some who decry the lack of competition in the U.S. internet access space might be surprised to see growing competition, at scale, when 5G arrives. Google Fiber once was thought to be a catalyst for such competition. Now it appears Verizon and possibly T-Mobile US will assume that role.

Sometimes it takes scale to disrupt a market.

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.

Could AT&T FTTH Footprint Reach 44 Percent by End of 2019?

What does it mean that AT&T will have 14 million fiber to the home passings by about the end of 2019? In a broad sense, FTTH means a chance for AT&T to retake market share from cable TV operators, which have about 65 percent of the installed base of total U.S. consumer internet access connections.

“Whenever we go into a neighborhood and turn up fiber, 25 percent (take rate) comes fast and 50 percent is eminently achievable,” said Randall Stephenson, AT&T CEO. “And we actually think we can hopefully get beyond 50 percent as we continue to get this build completed.”

AT&T’s fixed network could represent--on the high side--perhaps 62 million consumer locations passed. That figure has to be interpreted. It could mean physical locations passed. It could mean dwelling units reached.

My own understanding is that this figure refers to dwelling units, not buildings. Here’s the difference: the U.S. housing stock is divided between detached houses and multiple dwelling units and other types of housing.

In 2000, detached housing represented about 60 percent of all U.S. housing units, according to the U.S. Census Bureau. In 2017, detached homes represented nearly 62 percent of housing.

So if AT&T’s fixed network is the same as the national average, AT&T’s network might pass 37.2 million single family homes. The rest of the housing units are apartments, condominiums, other forms of attached housing, mobile homes, boats and trailers.

So assume there are 24.6 million attached dwelling units in AT&T’s fixed network footprint. One has to estimate “locations” to be served from the dwelling unit counts. We will exclude boats, trailers or mobile homes as feasible FTTH locations. Assume that “locations” (buildings) represent about 28 percent of dwellings (by definition, an MDU is one location with multiple dwellings).

In that case, there might be some 6.9 million MDU locations in the AT&T fixed network service territory. That blends MDUs of all sizes into a composite average of 3.5 units per building. So make the universe of residential locations 31.5 million.

AT&T says it will have 14 million FTTH locations in service by the end of 2019. Assuming 100 percent of those locations are single-family homes, AT&T FTTH locations would be about 44 percent, with most of the rest served by fiber to the neighborhood. It is unclear how many all-copper lines remain in service, but it is possible there are as few as a million.

Still, AT&T’s interest in high-capacity access that costs less than FTTH remains. For even if it were able to boost its market share (installed base) of consumer internet access to as much as 50 percent, half the assets would still be stranded, producing no revenue.

For AT&T no less than Comcast, lower-cost infrastructure provides two benefits: fewer stranded assets and a lower-cost base, which provides more room to either lower retail prices or boost profit margins.

Keep in mind that 25 percent take rates also imply 75 percent stranded assets. Fixed wireless built on the 5G mobile network has clear potential advantages, including lower incremental cost to supply the equivalent of fixed access and lower total capex, with lower stranded asset risk.

Can ISPs Keep Increasing Internet Access Speed at Moore's Law Rates?

Perhaps improbably, at least some internet service providers--Comcast in particular--have been doubling the top speeds on their networks at rates consistent with Moore’s Law . “Comcast has increased speeds 17 times in 17 years and has doubled the capacity of its broadband network every 18 to 24 months,” Comcast says.

Comcast says gigabit speeds now are available to nearly all of the company’s 58 million homes and businesses passed in 39 states and the District of Columbia.

Of course, not every platform, or every ISP, has been able or willing to boost average speeds that much. The general rule is that a hybrid fiber coax network mostly can boost speeds by swapping out customer premises equipment, where a telco has to replace copper access networks with optical fiber. The former simply costs less than the latter.

source: youreeeka.com

That explains why cable TV operators tend to supply a disproportionate share of the fastest connections in the United States and United Kingdom, for example.

source: FCC

If  want to know why mobile service providers see upside in 5G , the ability to upgrade speeds to gigabit ranges without having to rip up copper access networks explains much of the interest.

Some have argued that fixed and mobile 5G is an existential threat to cable operators for that reason. Some us might argue that danger likely is overblown, but other existential problems arguably exist, among them declining revenue growth rates, profit pressures, lower average revenue per account and shrinking of revenue for virtually every legacy revenue stream.

Mobile substitution for fixed network voice services is one problem. But mobile messaging and voice revenues now are declining in most countries, while internet access prices also are dropping in most countries.

Sometimes, in some markets, actual price declines are disguised. That can happen when posted retail rates are not the prices most consumers pay; when customers actually buy more-costly packages over time; as prices per gigabyte fall or when prices are not indexed for inflation or compared to household income levels. In most developed countries, internet access costs less than one percent of household income, for example.

It also is common for ISPs to increase speeds on given tiers without price increases. That is an effective price cut, even if the nominal or posted retail price remains unchanged.

source: FCC

source: PCmag.com

Today, 75 percent of Xfinity Internet customers choose plans with speeds of 100 Mbps or more, double the speed those customers took just three years ago, Comcast says.

One can see the shift in consumer demand to faster-speed tiers in data from 2011 to 2015. Over that four-year period, speeds more than doubled, for some telcos, and increased by 300 percent to 400 percent for many cable operators.

source: FCC